Credit cards for people with poor credit scores are few and far between, but FS Card is looking to change that with its first product, the Build Card, an unsecured credit card designed specifically for borrowers with subprime credit scores.
If you’re in need of a couple of hundred dollars and your credit score falls below 600, you’re not likely to get approved for an unsecured credit card. You’re considered a subprime borrower — a lending risk to banks, who worry they won’t get their money back.
But when banks refuse to lend to risky borrowers, those consumers turn to more expensive short-term borrowing options like payday loans, auto title loans, and pawn products. Annual interest rates on those products often exceed 300%, according to research from the Pew Charitable Trusts. Paying a high interest rate and a number of additional fees attached to those short-term products can trap consumers in a cycle of debt.
What is FS Card?
FS Card was founded by former Consumer Financial Protection Bureau Assistant Director of Card and Payment Markets Marla Blow in 2014 to fill what she says was a gap in the credit card industry. Blow says she began FS Card when she noticed — after the housing market crashed in 2008 — banks began “pulling back from subprime consumers in a very directed way,” because they were wary of tougher regulations on the financial industry. As a result, those consumers turned to more expensive products like payday loans, she says.
“I wanted to be able to put that consumer into a place where, rather than having to go out and get a payday loan, they could use a credit card,” Blow says. She designed the Build Card to offer subprime consumers access to something that “a lot of our economy assumes is already present” — a rotating line of credit.
Build Card overview
The Build Card is an unsecured credit card for borrowers with subprime FICO credit scores in the 550 to 600 range (on a scale of 300 to 850). The invite-only card charges a variable 29.9% APR. The rate is high for a credit card but about 10 times less expensive than some payday loans. However, it’s not a card you’d want to open unless you are seriously in need of the funds and are looking to build your credit score.
What we like about the Build Card
Payday loan alternative
Ideally, a payday loan is used to meet short-term borrowing needs — to hold you over until you receive your next paycheck. However, Pew research shows the average borrower uses them for five months at a time on average and has to pay an average $55 fee ($95 online) each time they extend the loan, which is what makes these loans so expensive. That’s $275 spent renewing a loan that’s on average $375. Furthermore, Pew research found seven in 10 borrowers use them for everyday expenses like groceries, rent, and utilities.
With access to a rotating line of credit, borrowers can extend the amount of time they have to repay borrowed money without having to pay renewal fees for a payday loan.
Unsecured credit card for subprime consumers
The Build Card is a rare unsecured credit card for those with poor credit scores. Most cards you can qualify for with a score lower than 600 are secured cards, which require a deposit to secure a credit line. For people who have a few hundred dollars on hand, a secured card is a great way to get access to credit, but many low-income Americans are not in a position to spend that kind of money.
Build your credit score
FS Card reports your activity to national credit bureau TransUnion so you can use the Build Card to improve your credit score if you maintain good credit management habits. Negative activity — like late payments and high credit card balances — will also be reported, so be sure to pay your balance on time and in full each month for best results.
Quick and easy approval process
Because you must be invited to apply for the Build Card, you are prequalified for approval. There is an excellent chance you will be approved for the Build Card, unless something on your credit report has drastically changed between the time FS Card mailed your invitation and when you apply.
No foreign transaction fees
The Build Card doesn’t charge you for using it overseas, so you don’t need to worry about racking up fees for swiping your credit card on vacation.
What we don’t like about the Build Card
As of this writing, the Build Card is invitation only and has more than 50,000 cardholders, Blow says. You’ll have to wait to receive a code in the mail before you can apply for the card online, which is unfortunate for anyone who is in need of short-term funds now.
FS Card selects borrowers using an algorithm to prequalify borrowers with subprime credit scores and sends invitations to potential customers monthly. The algorithm sifts through consumer credit reporting data to identify consumers who have recently done something that reflects better borrowing habits like paying off a payday loan or an account in collections.
Blow tells MagnifyMoney FS Card will offer an open application for Build Card in 2018.
This card carries a lot of fees. If you’re trying to build your credit and have the funds to get a secured credit card that doesn’t charge an annual fee or has an interest-free period, you’re better off going that route, as it will be significantly less expensive.
- Startup & membership fees: It costs Build Card customers $125 simply to open the account. FS Card charges the initial start-up fee ($53) and annual membership fee ($72) on your first statement. Although the card begins accruing interest immediately, Blow tells MagnifyMoney FS Card does not charge Build Card users interest on the start-up fees assessed to the credit card.After the first year, the annual membership is paid in $6 monthly installments, charged to the Build Card.
- Authorized user fee: If you authorize another person to use your Build Card, you’ll be charged a $12 fee per authorized user.
- Late/returned payment fee: Don’t miss a payment on this credit card, or you’ll be charged a whopping $35 fee.
- Cash advance fee: Try your best not to take cash from this credit line — in addition to paying 29.9% interest, you’ll be charged the greater of $10 or 3% of the amount you take.
A $500 limit
If you need to borrow more than $500, you’re out of luck with this card. Everyone who opens a Build Card account starts off with a $500 limit. But remember, that limit is immediately reduced to $375 once you open the card and are charged $125 in fees. That also doesn’t leave you a lot of room to spend, considering it’s bad for your credit score to carry a balance close to your credit limit. Blow says the company may soon offer starting lines above and below $500.
Right now, FS Card checks every month to see if you’re managing the card wisely (read: making payments on time). If you are, you could qualify for a credit line increase to $750 in as soon as seven months. Blow says 59% of Build Card customers have gotten increases so far.
No 0% interest period
This card doesn’t come with an interest-free grace period. It will begin charging a 29.9% APR to your purchases immediately.
No balance transfer
The Build Card doesn’t come with a balance transfer offer, so you won’t be able to use the card as a debt consolidation tool. If you are in a large amount of credit card debt, you could try applying for a personal loan through online lenders like Lending Club or Prosper, which offer personal loans to people with credit scores below 600.
Who is the Build Card best for?
The Build Card is worth opening if you:
- have a credit score between 550 and 600,
- are ready to start rebuilding your credit score, and
- want an alternative to payday loans in the event of an emergency but don’t have the cash on hand to open a secured credit card.
Beware: If your poor credit history resulted from poor spending habits like spending more than you could afford or making late payments, ask yourself if you’re ready to make a change. Opening this credit line won’t help your credit score any in the long run if you don’t.
How to apply for Build Card
You must be selected to apply for the Build Card. When you receive your invitation to apply, you’ll be given an offer code and application ID to enter into the application form on the Build Card website. Enter that information, your ZIP code, and the last four digits of your Social Security number to apply for approval. You should know if you’re approved or not within a few minutes.
Alternatives to the Build Card
The post FS Build Card Review: Build Credit With This Payday Loan Alternative appeared first on MagnifyMoney.