When you’re new to building credit, starter credit cards don’t have to feel like a gate to climb over before you qualify for something better. More than ever before, secured cards, student cards and even cards from certain startups are offering cash-back rewards to newbies, much like you would get with a card designed for someone with a more established credit history.
Newer credit card products — especially alternative cards that can use nontraditional underwriting to determine eligibility — are straying from the idea that robust card features are only for those with good or excellent credit. Now, there are compelling options that allow the chance to build credit and earn rewards at the same time. Here are some reasons for the change.
Nerd tip: If you have a thin credit file, or none at all, be aware that even if you do get approved for a starter card, your credit limit on that card will likely be small. Low spending power means low rewards-earning ability — but some rewards are better than none at all.
Some startups view new-to-credit consumers differently
Certain credit card issuers, especially newer players, can weigh an application not only on three-digit credit scores, but also on factors that don’t appear in your credit report, such as income and savings — information that is provided when you link your bank account. Petal, which began offering cards to a wide audience in 2018, is an example.
"Prior to companies like Petal, people were penalized for having a short credit history," says Jason Gross, co-founder and CEO of Petal. "The industry equated 'short' credit history with 'bad' credit history."
But Petal doesn't just facilitate access to credit for newcomers; it also now offers them rewards. In May 2019, the company added a cash-back program, and holders of the Petal® 2 "Cash Back, No Fees" Visa® Credit Card can earn up to 1.5% back on all purchases. Terms apply.
"We also believe that if you can demonstrate your creditworthiness by sharing your larger financial picture, you deserve to be rewarded from day 1 ... which is why we introduced our rewards program last year," Gross said in an email.
That 1.5% cash-back rate has long been an industry standard, but typically only among major issuers, and often only on cards meant for those with good to excellent credit — not for credit beginners.
Deserve is another company that offers products for those who lack a credit history, including the Deserve® EDU Mastercard for Students.
Like Petal, Deserve is able to consider factors beyond just your credit scores — including income and savings, provided via a linked bank account — when evaluating creditworthiness for the card, which earns 1% cash back on all purchases.
Competition is increasing
More startups have entered the credit card space in recent years, and rewards seem to have become table stakes.
The Upgrade Card is not necessarily a "starter" product per se; you'll likely need at least fair credit to get it. But the card offers a rare feature that could be beneficial for those who aren't sure if they're eligible: It lets you see what credit line you’d qualify for without conducting a hard inquiry on your credit report. (Only when you agree to the terms is a hard pull initiated.)
When it comes to offering rewards, Upgrade notes its decision was based on consumer demand. "When we asked them 'what would be the one extra feature you’d love to see in Upgrade Card?' the #1 response was always rewards,” Upgrade co-founder and CEO Renaud Laplanche said in an email. "So we built it!"
Meanwhile, the X1 Card, slated for later in 2020, promises rewards rates that can range from 2 points to 4 points back per $1 spent. The card will use applicants' income as a factor when evaluating creditworthiness, and it promises only soft credit inquiries when you apply.
Even traditional issuers offer paths to rewards
Secured credit cards can often be the easiest kind to get for a beginner, since they require a deposit as collateral to reduce risk to the card issuer. Among these options, the Discover it® Secured Credit Card credit card has historically offered cash-back rewards, which is rare for cards in its class.
And speaking of classes, student credit cards from major issuers — including Discover and others — can also be options for those who are just starting out. Many of these products, too, come equipped with basic rewards programs and other student-friendly extras.
But some traditional issuers are going further.
Consider American Express' partnership with Nova Credit, announced in 2019. It makes it possible for recent immigrants to qualify for an American Express product — including rewards-earning cards — based on their credit histories from select countries. They don't necessarily need to have built up such a history in the U.S. first.
Rewards can help incentivize credit-building actions
For many starter cards, rewards may serve a double purpose: attracting and retaining cardholders, and nudging them toward behaviors that can help them meet certain financial goals.
As noted above, the Petal® 2 "Cash Back, No Fees" Visa® Credit Card lets you earn a 1.5% rewards rate, but only after you make 12 monthly on-time payments — a habit that, incidentally, also helps build credit. "When we thought about crafting our rewards program, it was critical to us that we tie it to responsible financial behavior," Gross said when the rewards program was announced.
Sallie Mae and SoFi both offer credit cards that earn additional cash back on top of their base rates when you apply your rewards toward a student loan. Cash back earned on Upgrade’s aforementioned card gets applied toward your next month’s bill like a prepayment.
Starter cards with rewards are reimagining how a broader audience interacts with credit cards and redefining what it means to be “creditworthy.”
“I think the most important thing is thinking differently about folks who are new to credit,” Gross says.