The road to credit building with alternative cards could be bumpy

In recent years, financial technology firms have developed alternative credit building options.

The new credit cards may evaluate your application differently than traditional cards. They use proprietary algorithms that place less importance on your credit score and instead look at other factors, such as income or balances in bank accounts. These products are also known for their lower costs: some of them advertise that there is no fee, annual or security deposit.

Nick Roberts is the chief marketing officer of Grow Credit in California, which offers financial technologies. “Many fintechs really focus on offering products that people would otherwise not be able to qualify for at major institutions,” he says. Fintechs are focusing on expanding the market.

While many of these relatively new cards can help build your credit, you should be aware that it may sometimes be a bumpy ride as the company offering the card grows.

Traditional and nontraditional credit card companies are permitted to change your account terms . However, depending on the changes, certain guidelines must be followed.

According to Lauren Saunders of the National Consumer Law Center, “they have to notify you 45 days in advance if they are going up the rate or making any major changes.”

The terms and conditions of an alternative credit card issued by a fintech are more likely to change than those on a traditional card. The updates can be either welcome or depressing.

A relatively new company may rebrand. This could mean that any number of features can change. CreditStacks launched a credit card with its name in 2018. By 2020, however, they had changed their company’s name to Jasper and were sending out new cards. Later, it became a card that offers cash back to people who have good credit.

Jasper’s credit cards have been discontinued since the rebrand.

Grow Credit introduced a credit cards in certain states in 2019. It will be available nationwide by 2020. You can build your credit using the card to pay for select bills up to a monthly limit. The card is linked to an annual membership program with different tiers, prices and options. One of them is free. At launch, there was only one free level.

Over time, the company has added other membership levels that may allow for additional bills to qualify and a higher spending limit. Roberts says that these additions provide more options to those who do not have credit.

TomoCredit is a San Francisco-based fintech that has made major changes to the original terms of its credit cards. In 2021, there was no annual charge. By 2023 the fees had increased to $2.99 per month and the credit card became a waiting list.

Fintech Petal, which has been around for several years now, offers low and no fee cards to customers who are looking to establish credit as well as good credit. Petal informed some existing customers in June and May 2023 that they will be charged a monthly fee.

Jamie Howard was one of those cardholders. The cardholder was informed that either he would have to opt out of the program and pay $8 per month or his account would be closed.

Howard: “I wasn’t happy at first, because I don’t enjoy paying fees.” If I choose to opt out of the service, it will affect your credit rating .”

Closed accounts can affect your credit score because they can reduce the duration of your history and impact on credit usage. Howard was most concerned about this, as he applied for the Petal credit card in order to establish his credit. After about three years, Howard decided that the fee was not worth the cost because he had other credit cards. He says, “I’ve since left.”

Do your research on any financial product before you apply. You might not receive the same service as a traditional banking institution, depending on which fintech firm you choose. This can be a trade-off.

Saunders states that a fintech’s lack of customer service is a chronic issue. One way they cut costs is to eliminate brick and mortar branches. They also do away with live customer support, instead relying solely on automated channels or chat. It works until it stops .”

It’s not true that all fintech firms operate in this manner, but you should know what to look for. Customer reviews online can be helpful. If you can build your credit with a card, it may be worthwhile if you have been denied a credit card or other credit cards are expensive.

Add a second credit card from an established provider to your wallet as you work towards better credit. This will provide backup in case the conditions of your other card are changed.