May 20, 2024

Unlocking Stronger Credit: Exploring Credit Builder Offers

By

Ross Johnson

For many Americans, having a solid credit score signals financial stability.

Various credit builder programs can assist with anyone’s financial journey, each designed to help establish, rebuild, or strengthen credit profiles.

Consumers are taking notice: According to a recent TransUnion study, more than 10 million consumers used a credit builder program in Q4 2023 alone – a 60% increase from the same period in 2022.

Credit builders operate on a straightforward principle: leveraging everyday purchases to showcase responsible credit behavior to major credit bureaus. By reporting timely payments on loans, credit cards, rent, utility bills, and other purchases, these programs enhance individual creditworthiness over time. The types of consumers interested in these products may include:

  • Young Adults: Whether they are recent graduates entering the workforce or just beginning their financial journey, young people often lack substantial credit history and will benefit from establishing financial independence.
  • Recent Immigrants: Immigrants often arrive with no U.S. credit history and need to build credit from scratch for access to loans and credit cards.
  • Adults Recovering from Financial Setbacks: Those who have experienced bankruptcy or foreclosure may use credit builder products to rehabilitate credit scores and regain financial stability.
  • Users of Non-Traditional Credit: People relying on payday loans or cash-based P2P transactions such as Venmo or CashApp can use credit builders to transition to mainstream credit systems and establish a positive credit history.

Not all credit builder programs are the same, although they all share the same goal. The differences in credit builder products can also lead to different targeting strategies for financial companies. Credit builder loans may be best for consumers who wish to boost their scores across multiple bureaus and can afford a significant monthly payment. In the end, some providers may offer the consumer a payment to help them establish an emergency fund or savings account. Secured credit cards may work well for consumers who wish to begin a relationship with a specific financial institution to unlock other types of products in the future. Rent or utility bill reporting products may be best suited for consumers who wish to improve their credit at no cost, albeit with fewer impacted bureaus.

Below are different types of credit-building products:

  1. Secured Credit Card:
    • Secured cards build credit by securing cash with a fixed deposit. No credit checks are required, making it ideal for those with limited credit history.
    • Deposit amounts range from $50 - $500 and spend limits are often equal to the security deposits.
    • There’s usually a minimum monthly payment required and balances are revolving, with potential increases upon good payment history.
    • By making on-time payments and managing spending responsibly, consumers will see improvements in their credit score over time.
    • Examples include OpenSky, First Progress
  2. Flexible Open Secured Cards:
    • Some programs use small monthly contributions from a Direct Deposit Account (DDA). These products often come with transparent pricing and instant approval. Sometimes, these options require users to open a checking account with the company.
    • Spend limits are linked to the deposit account balance.
    • Balances are typically due in full monthly and automatically withdrawn from the deposit account. With consistent payments, this can lay the foundation for strong credit.
    • Examples include Chime and Current
  3. Rent Reporting Services:
    • For renters, certain programs report rent payments to credit bureaus. This can help diversify credit portfolios and boost scores.
    • Positive rent history can make approvals easier when applying for new residences.
    • Examples include Self and Super
  4. Credit Builder Loans
    • Installment or personal loans are available for amounts up to a certain limit, usually $300 - $1000, secured by a locked cash deposit in a CD or savings account.
    • Programs require individuals to make fixed payments over a specific period of time.
    • Deposits are unlocked at the end of the term, which is usually 4-12 months and may include interest. The money is used to pay off the loan balance and demonstrates responsible borrowing.
    • Examples include MoneyLion and most credit unions
  5. Membership-Based Services
    • Some programs operate on a membership basis and offer a suite of credit building tools and resources.
    • These often include access to educational materials and financial counseling services, empowering people with the knowledge and skills to make informed financial decisions.
    • Often, memberships provide credit monitoring services which allow individuals to track their progress and identify areas of improvement.
    • Examples include StellarFi, Kikoff, and Cushion

Conclusion:

Regardless of the specific credit builder program, the key for consumers is to make timely payments and practice responsible spending. By leveraging these programs effectively, individuals can gradually build stronger credit profiles and open doors to new financial opportunities. For financial companies, it’s crucial to consider not only consumer personas but also their credit needs in both product development and marketing strategies to maximize ROI.