Amazon’s newest credit card is designed to appeal to consumers who are looking to improve their credit score. It comes with an unusual structure — and some major caveats.
The Amazon Credit Builder card AMZN, +0.05% will function as a secured credit card, but with the same benefits as Amazon’s Store Card. When opening the card, as with any secured card, consumers must make a refundable security deposit with Amazon’s partner on the financial product, Synchrony Bank SYF, +1.86% That deposit will then represent the card’s credit limit. Consumers can establish credit lines ranging from a minimum of $100 to a maximum of $1,000.
Like many other retail cards, however, the Amazon Credit Build card can only be used for Amazon purchases, making it a “closed-loop” card.
The structure of the new credit offering struck credit-card experts as rather unusual. “I’ve looked at hundreds of retail cards, and I can’t recall ever seeing a secured retail card,” said Ted Rossman, industry analyst with CreditCards.com.
(Amazon and Synchrony declined to provide additional comments regarding the card on the record.)
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Here are other features of the card:
• Amazon Prime members who open the card can receive 5% back on purchases at Amazon.com. The account must be in good standing to redeem the rewards.
• The card has no annual fee — though consumers would need to pay the $119 yearly membership fee for Amazon Prime to get the cash-back reward.
• After making the account-opening deposit, card holders will receive a $40 gift card.
• Card holders will have access to 0% APR financing options on large purchases.
• On-time payments will be reported to the three major credit bureaus: Experian EXPN, -0.71% , Equifax EFX, -1.48% and TransUnion TRU, -1.47%
•The annual percentage rate for the card currently stands at 28.24% and resets based on the Prime Rate. That’s higher than the average retail card interest, which was 25.64% as of November 2018, according to CreditCards.com.
Amazon is looking to appeal to lower-income consumers
This card is clearly geared toward a different audience than the company’s other credit cards, including the Amazon Prime Rewards Visa V, -1.14% , which was released last year.
The Amazon Credit Builder card is explicitly aimed at people with bad credit and those who are new to credit. Amazon has also partnered with TransUnion to create a dashboard through which consumers can monitor their credit score and learn how to use their credit card wisely.
“Secured credit cards are my favorite cards for folks who are getting started with credit or rebuilding it,” said Matt Schulz, chief industry analyst at CompareCards.com. “They’re a great training-wheels card because there’s so little risk involved. After all, with typical credit lines of $200 or $250, there’s only so wild you can go with your spending.”
But Schulz cautioned that because the Credit Builder is a retail card, there are some important potential pitfalls that consumers should be aware of, namely a higher-than-average APR and rewards that may not be as good as the ones offered by general purpose cards.
Consumers will have the option to upgrade to the Amazon Store Card if their account remains in good standing. Though, not all consumers should necessarily make this move.
“Upgrading the card means getting your security deposit back, so that’s a good thing,” said Greg McBride, chief financial analyst at Bankrate. “But ultimately, whether a card is secured or unsecured, it is how disciplined the cardholder is with their spending and repayment of the balance that determines success or failure in a financial sense.”
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To qualify for the upgrade, card holders must make seven consecutive on-time payments over the course of 12 months. Card holders would also need to have a credit file with no recent bankruptcy, foreclosure or delinquency events and a credit score that meet’s Synchrony’s criteria.
The move to offer this card fits in with other efforts Amazon has made to appeal to lower-income consumers, including when the company began charging a lower membership rate for Amazon Prime for consumers who rely on government assistance.
‘It sets the bad precedent of using a credit card to finance purchases that can’t be paid for in full.’
The card’s perks may be too good to be true
Many of the perks designed to help this card stand out from other secured credit cards could become double-edged swords.
For starters, Amazon’s choice to offer rewards on the card could easily backfire for consumers. Credit card rewards, however, are almost inherently designed to encourage overspending. Financial experts argue that offering these rewards in turn could promote bad spending habits and make it harder for consumers to build up their credit score.
Moreover, the special financing offers could end up costing consumers big time if they’re not careful. Amazon Credit Builder card holders will have access to two forms of special financing. For purchases of $149 or more, they can apply to receive 0% financing for between six and 24 months.
Consumers can also request “Equal Pay Financing” for purchases of $300 or more, where they will make equal payments each month for a year at 0% APR.
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Both of these supposed deals have drawbacks. Namely, if consumers don’t pay the full balance off in time, they will be forced to pay interest on the full purchase amount. And with the equal-payments offer, missing a payment could hurt the buyer’s credit score.
“More cards and card issuers are offering the ability to segregate out specific big ticket purchases for special financing arrangements in hopes the card holder will continue to use the card while paying off that big-ticket purchase rather than putting it in a drawer until it gets paid off,” McBride said. “The risk to those who are new to credit or rebuilding credit is that it sets the bad precedent of using a credit card to finance purchases that can’t be paid for in full.”
The card’s high interest rate should also be a major concern to consumers — and can be avoided if they pay the balance in full each month. But that might prove difficult for someone on a tight budget.
Finally, because of its unique structure, the Amazon Credit Builder card comes with one of the major caveats of most retail cards: Consumers can’t use it elsewhere. That makes it potentially less useful than other secured credit cards banks offer, such as the Discover it Secured card DFS, +0.68% and Citi Secured Mastercard C, +0.67% , which can be used at any number of retailers.
Consumers should approach any retail card with caution, Schulz said, because people often feel pressured into signing up for them, then regret doing so. In fact a 2018 survey by CompareCards found that 47% of people who got store cards were sorry they did.“If you interested in a card, your best move is to say no when it’s offered to you and then read up on the card once you get home,” Schulz said. “If it’s still interesting to you, go ahead and apply the next time you’re in that store. Chances are all the same perks and details will still apply, but you’ll be making a less pressurized, more informed decision.”
Shares of Amazon are up 11.3% over the last three months. Comparatively, the Dow Jones Industrial Average DJIA, -0.05% and S&P 500 SPX, -0.07% are up only 2.1% and 4.75% respectively over that same period of time.