Perhaps you’ve heard of Chime. They’re an online-only bank, which has gained a lot of popularity in recent years. While we have no relationship with Chime, and recieve no financial compensation from them, we’re big fans of their banking services.
Chime offers checking accounts with none to reduced overdraft fees, as well as minimum balance requirements, and no monthly account service fees. As a result of this reduced-fee structure, Chime has gained quite a following, and grown to more than 8 million accounts. A Chime checking account is known as a Spending Account.
Chime also offers an interesting service around direct deposits of paychecks, by your employer. With most traditional banks, once a paycheck is deposited, it takes up to 2 days to clear. Chime makes checks available instantly, which is convenient for paying bills.
Chime also offers a savings account. While interest rates are quite low (though still higher than most other savings accounts), Chime makes it possible to round up purchases which were completed using your debit card (i.e. checking account) to the nearest dollar. This money can then go in your savings account. Also, their savings account makes it possible to automatically save a percentage of your monthly checking account.
More recently, Chime announced that they would start offering a secured credit builder card. Since we’ve had many questions about this card, we figured we would share our candid thoughts.
How Secured Cards Work
First, it’s important to understand a bit about how secured credit cards work. Secured credit cards are intended if you have either bad credit, or no credit, to help you build a stronger credit score.
Of course, if you have damaged credit, few traditional credit cards will approve you. Secured credit cards solve this problem, by having you provide a deposit, which equals part or all of the spending limit on the card.
So, let’s say you give the card issuer a $200 deposit. Your spending limit could be anywhere from $200 to $300.
This means if you spend on the card, and fail to make payments, there is very little risk to the credit card issuer. They simply take your deposit.
How do these cards help your credit score? Simple. First, your monthly spending on the cards is reported to the credit bureaus each month. If you keep your balances (spending) low, that is beneficial to your FICO score.
Ideally, you’ll keep spending below 10% of your limit on the card. That means that if the card has a $200 limit, you should try to keep your spending below $20 – at least, as of the date when your balance is reported.
Your credit card balances / spending accounts for 30% of your FICO credit score. The lower your balances, the better.
You’ll also benefit from paying the card on time each month. Typically, you have to pay off a portion of your monthly spending, each month. So, if you spent $20 on the card, you’ll need to pay a minimum amount, based on your interest rate.
This might be just a few dollars. As long as you do this, you’ll be marked on your credit reports as having paid on time. Keep in mind that payment history is very important – it makes up 35% of your FICO score.
However, if you pay off the $20 in full, you won’t have to pay any interest whatsoever. So, it makes sense to try to pay off your balance, whenever possible.
Now that we understand how secured cards work, let’s take a look at what Chime offers. We will be comparing Chime to other secured cards, so that you can gain a sense of your options.
Deposit Required
Recall that Chime focuses on offering checking and savings accounts. For this reason, Chime requires you to have a checking account open with them, before qualifying for their secured credit card.
Also, Chime requires that you have $200 in direct deposits, over the past 12 months. How does this work? If you hold a salaried position (or even work as an independent contractor), you can arrange with your employer, to directly deposit your pay into a bank account. As long as you’ve had some of these deposits in the past year, Chime will allow you to obtain a secured credit card.
That’s not, however, the only requirement. Chime will also require you to move some money (as little as you like) from the checking or savings account, onto your credit card. The amount of money you move onto the card then becomes your spending limit on that card. This means that you can’t spend more than that amount.
So, if you shift $200 from your savings account onto your credit card, then you can spend up to $200 on the card. Our suggestion is to place a deposit of $200 on the card, and keep it there. If you cannot afford a $200 deposit, then you may want to hold off on opening a secured card, until this becomes possible.
Using Your Chime Secured Credit Card
Let’s assume you qualify for the credit card with Chime. What is the wisest way for you to use this card? We would suggest making no more than one small purchase on the card, and paying off the card in full.
Why just one purchase? Well, let’s consider simplicity. If you have to remember each purchase you made, and otherwise worry about keeping track of things, it becomes increasingly complicated. By simplifying the process, you make things easier for yourself.
Secondly, it’s important to understand how credit scoring actually works. The second biggest factor in your credit score are your debts. Of particular importance are credit card debts. If you keep your spending on credit cards low, you preserve your credit score.
No Credit Card Utilization
One of the really unique features about Chime, as compared to other secured credit cards, is that Chime doesn’t report utilization on credit cards. What does this mean?
Recall that for a Chime secured credit card, you simply move money from your checking account, to your credit card. You could move over as much (or as little) money as you like.
Therefore, there is no fixed spending limit on the card. You can change the spending limit at any time, by simply moving more money onto the account.
Recall that the lower your credit card utilization, the better it is for your FICO score. So, having no utilization reported, is even more beneficial!
Drawbacks Of Chime’s Secured Card
We know that very few products are perfect. Chime is no exception. It does have a few drawbacks.
First is that you must not only have an account with Chime, but must have completed a direct deposit (of $200 or more) in the past 12 months. We like Chime’s bank accounts, and think direct deposit is an excellent tool.
With that said, the fact that you’re required to do it, is less enticing. Other secured cards, such as Discover, Capital One, and Credit Builder Card, have no such rules.
Chime also does not allow you to “graduate” to an unsecured credit card. Secured cards from Discover, Capital One, and some other companies, review your account after a certain period of time (sometimes, as little as 8 months).
If you’ve been paying on time, they’ll often refund your deposit, and offer a higher limit on your credit card. You now have a traditional (i.e. unsecured credit card).
Chime offers no such options. You will have to maintain a deposit with them, to have the card stay open. Your spending limit always equals your deposit. This is a real downside of Chime, when there are other options available.
The Final Verdict
So, should you go with Chime, or choose a different type of secured / credit builder card? If you’re brand new to credit (or have poor credit), and you have a job which pays you through direct deposit, then Chime is an excellent option.
Their bank accounts are top notch, and the absence of interest charges and other fees makes this an attractive card. We also really like the flexibility of Chime, which permits you to deposit as much (or as little) as you wish on the card. Lastly, the absence of credit utilization will be very beneficial to your FICO score.
If you don’t have direct deposit, then you should forego Chime. Stick with a secured card from Discover, Capital One, or OpenSky.
If you go with Chime, you should monitor your credit regularly. Since Chime doesn’t offer free credit reports and scores, we suggest signing up with Credit Karma (for your free TransUnion and Equifax reports), and Experian (which directly offer free credit scores).
As your score improves, consider opening unsecured credit cards, to further build your credit score. Having strong credit is critical to your financial well-being, and offers unique peace of mind. Chime is a good way to get there.
