Banks Offer Credit Cards To People Without A Credit Rating – Will This Really Help Consumers?

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A pilot program is planned this year that will offer Americans, who normally cannot access credit, the opportunity to open credit cards. It is unclear if Americans should receive one of these cards.

A group of large banks including JPMorgan Chase
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Wells Fargo
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and US Bancorp
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– plan to start offering credit cards to people who don’t have a credit rating, The Wall Street Journal reported on Thursday… Instead of a credit check, banks will start sharing information about people’s bank accounts with each other and use that data to determine if they qualify.

(Wells Fargo said in a statement that he was “unable to confirm details or comment” on the magazine’s report, but added that he “had nothing to fix in what was reported.” JPMorgan and US Bancorp did not immediately send request for comments.)

The pilot is reportedly the result of efforts by the Comptroller’s Office – the Treasury bureau that regulates banks – that began last summer following nationwide protests following the assassination of George Floyd by Minneapolis police. The initiative aims to provide credit creation opportunities for many people who do not have a credit score or file.

According to a 2015 report by the Bureau of Consumer Financial Protection, about 26 million Americans were credit stealthy, meaning they either did not have a credit history or didn’t have enough to get a credit rating. The report indicates that black and Hispanic consumers, as well as people from low-income areas, are more likely to remain invisible to credit histories.

By comparison, according to data from the Federal Deposit Insurance Corporation for 2020, only 7.1 million households nationwide do not have a bank account. This is the lowest figure since the FDIC began tracking this data in 2009.

“It can help a lot of people who don’t have access to traditional ways to get a loan, but who pay their bills on time without leaving their checking accounts,” said Sara Ratner, a credit card expert at personal finance website NerdWallet. …

However, the success of the program may depend on how well cardholders can manage their accounts – and how the cards compare to options already on the market.

Credit card opening is not reliable

Creating more credit creation opportunities will certainly be beneficial for people who have struggled to gain a foothold in the financial services industry. But experts warn that it carries risks.

“Expanding access to credit is always, always risky,” said Matt Schultz, chief industry analyst at LendingTree. “There are definitely people out there who will take on this newfound reputation.”

Opening a credit card can be one of the easiest ways to get a loan. According to Ratner, if cardholders make payments on time, their credit score can increase over the course of several months.


“Expanding access to credit is always, always risky.”


– Matt Schultz, LendingTree Principal Industry Analyst

But for people who are not used to budgeting the way a credit card requires, it may take a while to get used to. “Using a credit card doesn’t mean you’re spending real money, so the bill at the end of the month might surprise you,” Ratner said.

A surprise invoice can quickly become unavailable given the high interest rates on credit cards. The average annual interest rate on credit cards was 16.15% as of May 12. according to CreditCards.comalthough the rates charged to people with lower credit ratings tend to be higher.

In any case, the annual interest rate on credit cards is significantly higher than on other types of loans. According to Freddie Mac, the average interest rate on a 30-year fixed-rate mortgage as of May 13 was only 2.94%.
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Thus, if someone accumulates only $ 1,000 in credit card debt and only makes the minimum payment for each billing cycle, it will take them more than three years to pay off the balance if the card has 20% per annum. The person in this position is also likely to have a high credit utilization rate – a measure of how much of the available credit they have spent, which is used in calculating credit ratings. “That alone could lower your credit rating,” said Ted Rossman, senior industry analyst at CreditCards.com.

Better options may already exist

Many companies have jumped into the fray in recent years by offering credit cards to consumers with bad credit.

IN Visa Petal Card, backed by PayPal co-founder Peter Thiel, specializes in lending to people with new or limited credit. The Petal card even features rewards that the company began offering in 2019.

Likewise, the Tomo credit card is for young people, students and immigrants and does not require a credit rating either. There is also no interest or commission charged on the Tomo card. Tomo uses bank account information to determine the applicant’s credit limit. Cardholders are not allowed to carry balance with them. Instead, payments are automatically debited from the bank account to cover the balance, and if not paid in full, the card is frozen.

Other retailers and finance companies have also shown brilliant debuts with cards aimed at people new to lending, including Amazon
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Apple
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as well as Venmo
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“We’re seeing debit cards and buy now, pay later services – like Affirm and Afterpay – taking market share away from credit cards. I think this is one of the reasons why credit card issuers are making efforts to attract new customers, including invisible credit institutions, ”said Rossman.


Companies like Amazon, Apple, and Venmo have issued credit cards in recent years aimed at people who are just getting started with loans.

While banks may want to hack into this market, which other companies are capturing, the timing of the launch of the new pilot credit card program is questionable. Many Americans managed to pay off their credit card debts throughout the pandemic, but banks were still hesitant to extend new loans given the significant potential for financial distress as unemployment remains high.

“Most credit card issuers are still much more cautious than they were before COVID,” Rossman said. Banks have yet to release information on how the new credit cards will work, including how high the respective interest rates and fees will be. Consequently, new cards may not be competitive with those already on the market.


“Secured cards are great for the consumer because they’re easier to get, and low credit limits mean you’re not going to spend too much.”


– Matt Schultz, LendingTree Principal Industry Analyst

In addition, consumers can turn to other, potentially less financially risky options that are far from new. Secured credit cards may be the best option. With these credit cards, the consumer makes a deposit, which functionally becomes his credit limit. They can spend up to this amount and must return the money if they want to charge more from their card.

“Secured cards are great for consumers because they’re easier to get, and low credit limits mean you’re not going to spend too much money,” Schultz said. The high utilization of credit poses a risk to these cards because consumers tend to make smaller deposits. The cards also do not bring rewards and may have a commission, which can make them less attractive.

But, according to Rossman, consumers can usually upgrade from a secure card to a new version within a year, allowing them to access more advanced card programs.

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