Credit scores without debt? Fintech cards baffle credit industry

livemint.com:

Fintechs with names like Chime Financial and Credit Sesame are advertising an unusual perk on some of their products: Customers can boost their credit scores without ever borrowing or paying back any money. Millions of Americans have opened these so-called credit-builder cards since the first major ones came onto the market around the start of the pandemic. Customers deposit money into these accounts to pay bills or make purchases, much like with a debit card.

Here’s the twist. Fintechs report some of these transactions to the credit-reporting companies as credit activity, or borrowing, even though no credit is ever extended to the customer. Fintechs tout credit-builder cards as a way to smooth out flaws in a credit-scoring system that, to some, makes little sense.

Under normal circumstances, the only path to build a credit score is to borrow money. In other words: People need to take out loans to establish credit scores, but they need credit scores to be approved for loans. Credit-builder cards, on the other hand, often don’t require credit checks at all, much less a particular score.

The cards are also designed to mainly report positive data. For example, the cards offered by Chime and Credit Sesame make it difficult or impossible for customers to become delinquent. For decades, nearly every decision in U.S.

lending has revolved around the little three-digit numbers known as credit scores. The credit-reporting companies—Experian, Equifax and TransUnion—gather reams of data on individual Americans and turn that into credit reports. Those data points are then fed into algorithmic models from Fair Isaac or VantageScore to produce credit scores, which are designed to predict the likelihood that a borrower will become