While major credit card issuers tightened lending standards and slashed credit limits amid COVID-19, some financial technology startups took a different tack.
In 2020, young companies like Grow Credit, TomoCredit and Chime launched or expanded credit cards that are available to those with less-than-ideal credit — because they don’t run a credit check at all. Instead of relying on the traditional FICO credit scoring model, these “fintech” products can evaluate alternative factors like bank accounts and money management to determine eligibility.
What’s more, these cards don’t feature annual fees or even APRs. It’s literally not possible to carry a balance on them.
Here’s how this new breed of credit cards differs from traditional cards and why they’re easier to get, even in tough times.
How startups can evaluate applicants differently
Traditional credit card issuers typically conduct a hard inquiry on your credit report to evaluate your creditworthiness. Hence, even before the pandemic, card options were slim for those with no credit or poor credit (FICO scores of 629 or lower).
But some new products on the market aren’t as concerned with your credit report as they are with other facets of your financial life.
Grow Credit, for example, offers the Grow Credit Mastercard, issued by Sutton Bank. The company has proprietary technology that evaluates income, according to Joe Bayen, CEO and founder of Grow Credit. Applicants must provide access to their bank account information.
The card allows you to build credit as you pay for qualifying monthly subscriptions like Netflix or Hulu. Subscription services traditionally aren’t factors in your credit reports, but Grow essentially gives cardholders an installment loan that can only be used to charge eligible subscriptions to the card. Cardholders pay off the bill in full each month and build credit along the way.
Cell phone bill payments can also be handled this way, if you’re willing to pay a monthly Grow membership fee.
“The combination of a small loan that can only be used toward a product of necessity makes our platform very resilient to recessions,” Bayen said in an email.
Or consider the Chime Credit Builder Visa Secured credit card, issued by Stride Bank, which also does not require a credit check. To get it, you’ll have to open a Chime Spending Account with an eligible direct deposit. You can use it to add money to your Credit Builder secured account, which determines your credit limit on the card.
“The direct deposit definitely does help us understand members’ income and spending habits in a way that makes this product safer for us to offer,” says Zachary Smith, head of product at Chime.
TomoCredit offers the Tomo Card. The startup’s technology allows its issuer, Community Federal Savings Bank, to determine eligibility for the card based on multiple factors, including income and account balances. The card also earns rewards. Linking a qualifying account through a third-party service is required.
Beneficial for cardholders and card companies alike
These kinds of cards come with guardrails that can minimize risks for both the consumer and the issuer.
For one, you can’t carry a balance with these products and, as such, they don’t charge interest. The companies behind these cards make money at least in part through interchange fees, which are assessed to merchants when they accept a credit card as payment.
Since you’re required to pay on time and in full, overspending is difficult to impossible. Both you and the card company can be less worried about a potential default.
Plus, payments are reported to all three major credit bureaus: TransUnion, Equifax and Experian. (The Grow Mastercard is reported to credit bureaus as an installment loan.) These bureaus record the information used to calculate your credit scores. Good scores of 690 or higher can save you money on interest rates for a car, a home or other credit cards.
And no-fee credit cards make it easier to keep the accounts open and active, which preserves the length of your credit history, another factor in your credit scores.
For LaToya Wilson , a 46-year-old Minnesota resident, the Chime Credit Builder Visa Secured credit card allows her to rebuild credit without the risk of credit card debt and to get closer to buying a house. She got the card in 2020.
“This time I’m more cautious about what I’m doing and (where) I’m spending,” Wilson says. “I see my credit score going up every month by using it.”