Amazon has a new credit card designed for people with low credit scores. In partnership with Synchrony Financial, the e-commerce giant is introducing the Amazon Credit Builder card. On its surface, the secured card looks like a solid option for anyone looking to start building up their credit, but there are some caveats that consumers should consider before signing up.
First things first, the Amazon Credit Card Builder is essentially only a useful option for existing Amazon customers. Matt Schultz, the lead industry analyst at CompareCards.com, says the card can only be used at Amazon. The fine print on the card provided by Amazon suggests it may also be used for some purchases at retailers who offer "Pay with Amazon" at check out, but that still makes for a relatively small number of places where the card can be used.
The benefits of the card are also quite limited for folks who aren't already making many purchases from Amazon. While Amazon advertises the card as having no annual fee, it does require an Amazon Prime membership to be eligible, and that service does have a fee: $119 per year for standard members or $59 per year for students. Sara Rathner, NerdWallet’s credit cards expert, says if you aren’t already a Prime member or planning to become one, "this extra fee may not be worth it at a time when you’re focused on establishing good credit habits."
If you are a Prime member and looking for something to help boost your credit score, there are benefits to staying in the Amazon ecosystem and getting the Amazon Credit Builder card. Prime among the reasons to check it out is the five percent cash back offered on all Amazon purchases. Rathner says there are no other secured cards out there that offer that high of a cash back rate at Amazon, and the e-commerce giant's endless supply of goods makes it easy to order everyday items and earn some money back. That, combined with a $40 gift card upon a person's first deposit was enough for Schultz to call the rewards offerings "pretty strong."
Of course, it's worth noting that Amazon often isn't the cheapest option when it comes to these types of items. A 2016 study by MarketWatch found Amazon is often more expensive than alternatives when it comes to cleaning products, cosmetics, home goods and clothes — the kind of stuff you may be buying regularly. LendEDU compared Amazon's prices directly to Walmart's and found the online retailer was on average 10.37 percent more expensive than its biggest brick-and-mortar competitor. While using the Amazon Credit Builder card may help to improve credit scores over time and offer a decent cash back incentive to stick with the company, users may be spending more on the whole for those benefits.
"It can be tempting to overspend because you’re getting cash back, especially on Amazon, where making an impulse purchase is far too easy," Rathner warns. "Remember that buying something you don’t need just because you get five percent cash back is still spending money unnecessarily. "
Because the Credit Builder card is a secured credit card, there is a little less risk involved than a standard credit card. That is because the credit line is determined by a refundable deposit made by the consumer. Put down $500 and you'll have a $500 credit limit on the card. "This limits the risk to the consumer and the card issuer," CreditCards.com industry analyst Ted Rossman says. "As long as you, the cardholder, have enough additional funds to pay your card bills in full, you should be able to improve your credit score, get your deposit back and upgrade to an unsecured card in as little as seven months."
However, that isn't to say there are no risks involved when making purchases with the Amazon Credit Builder card. It carries a 28.24% interest rate for any purchases that aren't paid off in time. That can get especially sticky with Amazon's promotional financing options that it offers for cardholders.
On qualifying purchases, Amazon lets consumers with the Credit Builder card access "special financing" to get zero percent APR for either six, 12, or 24 months or "equal pay financing" that sets interest-free monthly payments spread equally over a the course of a year. Assuming consumers are able to meet the payment requirements on the purchases, the financing options could be beneficial. However, failing to pay off the product within the promotional timeframe could lead to some seriously devastating charges.
Rossman points out that if a cardholder fails to pay off the item in full during the zero percent interest period, "you’ll be charged retroactive interest on the average daily balance going back all the way to the original purchase date.”
Shultz explains simply, "That means that if you don’t pay your whole purchase off during the introductory period, you can get stuck with a big bill. That can be a really unpleasant surprise."
Even with some considerable caveats that consumers need to be careful with — and that Amazon should more explicitly lay out in layman's terms so people don't wind up in a debt trap while attempting to improve their credit score — the Amazon Credit Builder card, used responsibly, could serve as a worthwhile tool for those looking to establish a more sound financial situation.
Shultz says the card is the first secured retail card he recalls seeing, and appears less predatory than most of its alternatives. "Retail cards are popular with folks with thin or imperfect credit in part because they’re easier to get than your typical bank credit card," he explains. "However, they also typically come with sky-high interest rates and other unfavorable terms that make them a dangerous choice for credit newbies."
If Amazon is your go-to for everyday goods and you plan to stay within your means and pay off purchases before the high interest rates kick in, the Amazon Credit Builder may be a good option. It offers better rewards than most of its secured card alternatives and the potential to upgrade to an unsecured Amazon Store card after seven months (with your security deposit returned, as well). Of course, that upgraded card is also designed to keep you in the Amazon ecosystem, too, so don't operate under the assumption that Amazon is doing you any favors. Amazon's motives here are to get you to spend more on its platform, but you can still use that to your advantage.