The Petal Visa Card V, -0.88% is geared toward people who have poor or non-existent credit. But a new rewards program launched by the card could end up becoming a roadblock for people looking to improve their credit score, experts say.
Petal, which has received backing from PayPal PYPL, -1.49% co-founder and entrepreneur Peter Thiel, launched the card last October in partnership with WebBank. It’s designed to appeal to people with weak credit. Namely, consumers don’t even need a credit score to sign up — nor do they need to make an up-front deposit to secure the card.
Instead, the company looks at consumers’ “digital financial records” to determine their creditworthiness. That record includes looking at bank accounts to get a sense of their spending habits. If they do have a credit score, then that may factor into their approval. Consequently, people who have a history of missed payments or bankruptcy may be denied.
The card also carries no fees and a credit limit up to $10,000. Its annual percentage rate varies between 15.24% and 26.24%; that higher range is well above the national average APR of 17.72%.
Petal says its new rewards program, launched in May, is designed to reward users for making on-time payments. Every card holder will initially earn 1% back on all purchases made with the card. After paying on time for six months, the rate will increase to 1.25% back. And after another six months, it will increase to 1.5% back, which is the most card holders can earn.
“Our goal here is to incentivize on-time payments,” said Jason Gross, Petal’s co-founder and CEO. “Missing a payment is one of the major reasons that credit-card users find negative marks on their credit reports — this program is built to prevent them from negatively impacting their score and to encourage them to build healthy payment habits.”
Credit card rewards overspending, which can hurt people’s credit
But some consumers may want to approach this concept with caution.
By their nature, credit-card reward programs can encourage people to spend beyond their means, financial experts said. “Rewards programs tend to cause people to over use their credit cards and eventually end up carrying a balance when they did not mean to,” said Luis Rosa, a certified financial planner based in Henderson, Nev.
“People tend to charge everything they can on their credit cards in order to take advantage of the point rewards. Meanwhile, the money in their checking out is higher than it normally would be,” Rosa said. “This can cause a false sense of the available money in the checking account.”
This can easily snowball, as the card doesn’t require users to pay off their balance in full each month but only to make some payment in order to receive the boosted cashback rate.
If people end up carrying a balance on their credit card, then they will be forced to pay interest that far outweighs the cash back they are receiving. The relatively high APR on some Petal cards reflects the higher risk profile of those who use it, said Brian Karimzad, co-founder of personal finance website MagnifyMoney TREE, -0.10%
Over-spending could also lead to consumers missing payments if they don’t have enough money in their bank account to pay off their balance — and that would hurt their credit score.
Even if consumers make on-time payments, the rewards program could worsen card holders’ credit. If over-spending leads to carrying a large balance, that would increase consumers’ credit utilization ratio, which negatively factors into people’s credit scores.
Consequently, a lot is riding on people’s ability to restrain themselves. “I think it’s a terrible idea,” said Liz Gillette, a financial planner with MainStreet Financial Planning, an advisory firm based in Odenton, Md. “You only win with credit cards when you pay them off in full every month and acknowledge the natural pull of wanting to accumulate reward points and how that may or may not deter you from your financial goals.”
Petal acknowledged the risk of over-spending, but argued that critics of the card have misunderstood the rewards program, Gross said.
To address potential concerns, the company has allowed users to set a spending limit below their credit limit through a mobile app connected to the credit card. “That’s a big change from traditional cards that encourage people to overspend by tying rewards tied to sky-high spending thresholds,” Gross said.
The company also has the autopay feature default so that consumers pay their full balance each month rather than make the minimum payment. Moreover, the app will show how much in dollars and cents carrying a balance will cost consumers, rather than just the interest rate they will be charged.
There are potentially better cards for building credit or earning rewards
The Petal Card isn’t the only kid on the block catering to this niche. For instance, Capital One’s Journey Student Credit Card COF, -2.81% has no annual fee and increases the cash back rate from 1% to 1.25% each month if consumers make on-time payments.
Even at its highest cash-back rate, the Petal Card is eclipsed by credit cards offered by other banks. The Chase Freedom Unlimited JPM, -1.03% card provides 3% cash back on all purchases up to $20,000 in spending. And the Citi Double Cash C, -2.30% card offers 2% back — 1% when the purchase is made and 1% when it’s paid off.
As for building credit, a secured credit card with no annual fee may the safest move for some consumers, Karimzad said. A secured credit card is often tied to a savings account, and the credit limit is based on either the amount in the account or a percentage of it. This money will then be used as collateral if a consumer misses a payment. In some cases, these cards can later be converted into a traditional credit card.
“The lower credit line limits the total purchases that can get hit with interest charges,” Karimzad.
There are potential drawbacks to these cards. Some still charge late fees, for starters. And not all lenders will report on-time payments on secured credit cards to credit-reporting agencies, including Equifax EFX, -1.83% Experian EXPGF, +1.05% and TransUnion TRU, -0.15%
There are other routes consumers can also take to build their credit profile. They can open a joint account with a friend or family member or get added as an authorized user on someone else’s card. This way, the other person can act as a safety net if they run into financial trouble as they use the card and make payments on it.
Alternatively, consumers can open a card without a rewards program and only use it to make small purchases that can be paid off quickly.