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No credit score? No problem. How big banks plan to approve you for credit by just looking at your bank account

John Ulzheimer weighs in on the news that big U.S. banks are planning to increase credit access.

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You may no longer need a credit score to qualify for a traditional credit card from large U.S. banks like JPMorgan Chase, Wells Fargo and U.S. Bank.

In an effort to give millions of consumers who don't have credit scores better access to credit, these big-name financial institutions (along with seven or so others) expect to launch a pilot program this year that gives them a new method of approving potential credit card holders, The Wall Street Journal first reported on Thursday.

According to the WSJ, the program will work like so: Upon seeing that a potential credit card customer has no credit score, banks will rely on that user's bank account activity, such as their checking and savings account balances and overdraft history, to determine if they can qualify for a new credit card.

The program is said to involve widespread collaboration between the different banks so that one can tap the other for any prospective customer's bank account activity when deciding whether to approve them for a credit card.

While it seems that the fine print is still being written, credit specialist John Ulzheimer, formerly of FICO and Equifax, says that the expected pilot program presents both upsides and downsides for everyone involved.

The pros and cons of this new system

For consumers, the obvious upside is that they can get access to a traditional credit card that they might not have gotten otherwise.

Those who are credit invisible can now have a line of credit in their name. This checks a lot of boxes for these consumers: They will now have a credit report and are on their way to building a credit score, Ulzheimer tells Select.

The risk for consumers, however, is taking on a credit card they don't know how to responsibly manage. New cardholders may not be aware of the interest and fees that accrue if they don't pay off their balances on time and in full every month.

For banks, this new method of checking a consumer's banking activity if they don't have a credit score will open the door to plenty of new customers. But Ulzheimer warns that a consumer's deposit accounts do not have the same value as a credit report, since they are entirely different metrics.

If it works, and the customer manages their credit card properly and improves their credit score, this could lead to the bank extending larger lines of credit to that customer for something like a mortgage. Ulzheimer notes mortgage approval would still be based on your credit report, among other factors.

What consumers should watch out for

Ulzheimer points out one big question mark with this new plan: Will the banks have the right of offset? "Right of offset" essentially means that banks can take money from your back account, such as your checking or savings, to pay down debt you have with another account at that same bank, like a credit card.

If banks issue credit cards to people without credit scores, there is a possibility that the fine print may include terms that says the banks maintain the right of offset if the credit card account goes into default.

"It's important for the bank because it's a form of security," Ulzheimer says. "I don't know if these credit cards that are being extended would fall under the purview to offset, but if they do, clearly the banks are in a safe position."

What consumers may expect

Unlike secured credit cards, which many banks already offer to credit-constrained consumers, this new pilot program seems to offer unsecured extensions of credit — or what you would otherwise refer to as a traditional credit card.

Given they are intended for people who don't need credit scores to qualify, Ulzheimer predicts that these credit cards may have very low credit limits ($1,000 to $2,000) and higher interest rates.

He also predicts the pilot program will be rolled out in baby steps, likely first to bank account holders that have a good relationship with the bank and who've avoided overdrawing from their account. Banks may only offer this to a small percentage of their deposit customer base in the beginning.

"I can't imagine this is going to be made available to... [everyone] straight out of the gate," Ulzheimer says. "They'll probably choose the cream of that crop to some extent, and that would be the people who managed their deposit accounts well."

Credit-building cards you can already access

If you lack a credit history, instead of waiting for the pilot program to be available to you, there are cards on the market geared toward people with no credit history.

Select analyzed 27 credit cards that are marketed toward consumers with no or poor credit to determine the best cards for building or rebuilding your credit. Taking into account a number of factors such as security deposit minimums, fees, rewards programs and APRs, we ranked our top six that you can find below. (See our methodology for more information on how we choose the best cards.)

Our number-one pick, the Petal® 2 "Cash Back, No Fees" Visa® Credit Card, is one of the few cards that charge zero fees: no annual fee, no late payment fee and no foreign transaction fees. And it stands out for consumers who are trying to build credit because there's no security deposit required. Plus, it offers its own cash-back rewards program.

Here are some of our other top picks:

Our methodology

To determine which cards offer the best value for building or rebuilding credit, Select analyzed 27 of the most popular credit cards available for consumers building or rebuilding their credit.

We compared each card on a range of features, including: annual fee, minimum security deposit, credit limit, rewards program, introductory and standard APR, welcome bonuses and foreign transaction fees, as well as factors such as required credit score and customer reviews when available. We also took into account how easy it is to upgrade the card from secured to unsecured and how quickly you can get your security deposit back.

Because it's unusual for credit cards aimed at consumers looking to build (or rebuild) their credit to have robust rewards programs, we did not analyze how many rewards points you can earn in the first year. For cardholders who are looking to rebuild credit, it's more important to practice good credit card habits — spending within your means, paying your balance on time and in full — than try to optimize your points balance.

For rates and fees of the Discover it® Secured Credit Card, click here.

For rates and fees of the Discover it® Student Cash Back, click here.

Petal 2 Visa Credit Card issued by WebBank.

Information about the Capital One Cards has been collected independently by Select and has not been reviewed or provided by the issuer of the card prior to publication.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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