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Secured credit cards can be secured by a cash deposit or a deposit account. Credit cards backed by a deposit account are often called credit-building debit cards or debit-credit cards. When you use a secured card that’s linked to a deposit account, your credit limit is determined by your deposit account’s balance — meaning you can’t spend more than you have, helping you avoid excessive debt while also building a credit history. And to top it all off, these unique secured cards usually don’t have annual fees or interest charges.
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How do credit-building debit cards work?
Most debit cards come with deposit accounts, like checking accounts. With these, you can typically only spend up to your account’s available balance. Since you’re not borrowing, traditional debit cards aren’t part of your credit history.
Credit-building debit cards are like a debit and credit card hybrid. They’re basically an alternative secured credit card but with a different security deposit.
Credit-building debit cards are usually secured with an existing, linked bank account. The linked bank account balance acts as your security balance and sets your spending limit. When you use the card to make purchases, the balance is typically repaid with the linked bank account. Those payments are then reported to the credit bureaus, which can help you build a positive credit history.
Most secured and unsecured lines of credit charge interest. But most credit-debit cards are free, and most don’t charge annual fees or an APR like a traditional credit card.
Benefits of credit building debit cards
One of the best benefits of credit-building cards is the opportunity to build a better credit history, and usually, that means fewer fees than traditional credit cards.
- Usually no APR. Most credit-debit cards don’t charge interest.
- Fewer fees. Unlike credit cards, most credit-building debit cards don’t charge annual fees — and many don’t charge monthly maintenance fees either.
- The account is secured. Most have some type of security, whether it be a linked bank account or a security deposit, making them a safer way to borrow due to the lower risk of accumulated debt you can’t repay.
- No credit check. The majority don’t require a hard credit pull, and if they do, the requirements are easier to meet than traditional credit cards or loans.
- Credit-building loans create a nest egg. These products are like savings accounts that you’re required to contribute to, and once the term is up, you get access to the funds.
What to watch out for
Credit-building products are considered safer than traditional borrowing methods, but with that safety comes some downsides.
- Low spending limits. Because these credit-building debit cards often require a security or deposit, the spending limits are typically much lower than traditional credit cards.
- Often requires linked bank accounts. Most require you to link an existing bank account, and most require you to open a specific checking account to qualify.
- Check where they report. Some credit-building products don’t report to all three credit bureaus. For example, Affirm only reports payments to Experian.
- Credit building loans take time. Unlike traditional installment loans, credit-building cards with loan installments won’t let you access funds until the term is over.
Who are credit-building cards best for?
Credit-building debit cards are great for anyone who wants to start improving their credit history. And if you have a poor credit history, most don’t require a hard credit pull at all, so your credit history isn’t a factor during the application process.
However, you’ll need a security deposit or a linked bank account that’s funded for credit-building debit cards to actually work. They won’t build credit on their own — you have to use the card so that repayments get reported to the credit bureaus.
Bottom line
Building credit takes time — often years of hard work. But many of these credit-debit cards can help push you in the right direction if you consistently use them and make all your payments on time. But taking on credit-building products isn’t the only way to boost your credit history — see more tips on how to build credit here.
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