Credit builder or revolving credit? Demystifying common credit card products

With COVID-related lockdowns easing, and many consumers starting to return to their normal shopping habits, consumers are starting to explore diverse forms of credit. New offerings that help users build credit history while still offering a debit-like experience are gaining popularity. So too are next-generation revolving credit cards that bring new rewards value propositions to customers. With multiple types of credit cards on the market, it can be difficult to understand how they work, what their benefits are, and how a user can engage with them. In this blog post we highlight some of the most popular types of credit cards and how the user experience differs from card to card.

Revolving credit card

How does it work?

Revolving credit cards are the most common type of credit card, offering a true line of credit. These cards will have a limit to the amount that can be charged on the card, and an interest rate. In order to qualify for a revolving credit card, a user will go through an underwriting process to assess their ability to pay (using their credit score or other alternative data). Users can typically spend up to their limit each month and can choose how much to repay, as long as it meets the required minimum. If a card holder doesn’t pay back the balance in full each month, the balance and interest fees are calculated and applied to the account, and charged to the following month’s statement.

What are the benefits?

Revolving credit cards offer consumers more flexibility to pay over time as a balance can be carried over each month (with interest). Additionally, credit card issuers generally receive higher interchange when revolving cards are used for payment. Card issuers return some of this interchange to cardholders in the form of rewards such as cash back, points, and new innovations such as crypto-based rewards.

Credit builder

How does it work?

Credit builder products that have recently come to market attempt to do just that, help cardholders who may not have extensive credit history — and therefore do not qualify for traditional forms of credit — build their credit score. They do this by creating a payment experience that functions a lot like a debit card, but has certain features of a credit card, such as reporting monthly payments to the credit bureaus. Typically, a user sets aside funds from their bank account and this amount determines their credit limit. A user can spend up to that amount, and at the end of the month they use the funds set aside to pay back their balance. There is typically no interest charged, and no balance carried over, as users are incentivized to pay their charges in full each month.

What are the benefits?

Credit builder products are a low-risk way for users to start experimenting with credit and to build their credit history. Typically no credit check is required, so any user can start to build their history. And because the user sets aside funds as their credit limit, the chance that they will default on their payment is minimized.

Secured card

How does it work?

A secured card is similar to a revolving credit card in that they both require an underwriting process, and charge an interest rate. However, a secured card requires a deposit from the card holder, which usually equals the card’s credit limit. Like with revolving credit, the cardholder is not required to pay their balance in full at the end of the month, and the account will accrue interest. The deposit is held for the life of the use of the account, and typically can’t be used to pay off the balance.

What are the benefits?

Like credit builder products, secured cards can help those who may not qualify for a traditional credit card start to build their credit activity. Because the card is secured by a deposit, the card issuer is more likely to approve users with limited or poor credit history.

Consumers are starting to ease back into their normal spending patterns, but each person’s credit needs can vary. Some consumers need a product to help build their credit, while others have established histories. By understanding the differences between some of the most common credit products on the market, issuers and consumers can choose the card that works best for them in the short and long term.