5 Things to Know About the Perpay Credit Card

The Perpay Credit Card, issued by Celtic Bank, is designed to help cardholders who want to build credit, but are seeking an alternative to secured credit cards. Instead of requiring a traditional, lump-sum security deposit, you'll have to link your paycheck as a dedicated funding source for your card bill, which — while helpful if you lack the funds upfront — can pose risks.

You can earn rewards with the card, though there are some notable limits to the card’s rewards program. Also, while there’s technically no annual fee for this card, there are a few other fees that make it expensive to carry.

Here are five things to know about the Perpay Credit Card.

» MORE: NerdWallet’s best starter credit cards for no credit

1. It’s an unsecured credit card for building credit

Credit card options can be limited if you have no credit or bad credit (FICO scores of 629 or lower). A common choice is a secured card, which requires an upfront security deposit. If that doesn’t appeal to you, there are some unsecured cards to choose from, including the Perpay Credit Card.

One way Perpay evaluates your application is by obtaining data from Clarity Services, a financial services company that provides lenders with alternative data not typically reported to the major U.S. credit bureaus, such as short-term installment loans, rent-to-own contracts and auto-title loans.

Clarity is a division of Experian, which along with Equifax and TransUnion comprises the "big three" U.S. credit bureaus. But according to Perpay, applying for the card won’t affect your FICO score or VantageScore, though it can affect your credit profile with Clarity.

Once you have the card, however, note that Perpay will report your payment activity to those traditional three major credit bureaus.

» MORE: Unsecured cards for bad credit

2. You must set up direct deposit of your paycheck, so be wary

Without a security deposit, you must prove to Perpay that you can afford your bills another way: through your income. You’re required to set up a direct deposit of at least a portion of your paycheck to open a Perpay Credit Card. As Perpay's terms and conditions state, that money will go into an "omnibus" program account, meaning one single account where the assets of multiple users are combined.

Be aware of what this means: Because you are authorizing your money to be "commingled" with other customers' cash in the program account, you are depending on Perpay (or some intermediary) to keep track of it. The account's host bank — which according to Perpay's terms will be JPMorgan Chase "or another bank we designate" — won't necessarily know which money is yours and which is someone else's.

A similar arrangement ended up burning customers of the fintech Yotta, when its intermediary — Synapse — filed for bankruptcy. Synapse and its partner banks had conflicting account records, making it unclear which funds belonged to which Yotta customers. Tens of thousands of Yotta customers were locked out of their accounts, unable to access their money.

Perpay's terms and conditions note that money in the omnibus account is "held in a manner designed to provide you with Federal Deposit Insurance Corporation (“FDIC”) pass-through insurance coverage up to the maximum permitted by law."

Still, it's worth keeping in mind that the risk isn't merely theoretical.

3. Choose how you want to use excess funds

If your application is approved, Perpay will tell you what amount you must direct-deposit. In its terms and conditions, Perpay offers an example of a $500 credit limit with a required direct deposit of $100 per month (or 20% of the credit limit). You can qualify for a credit limit of up to $1,500, and can be considered for a higher credit limit within three months.

If you don’t spend up to your credit limit, excess deposited funds can be used in a few ways. You can keep the money in your account for a future credit card bill, or to make purchases through the Perpay Marketplace, where you can buy merchandise and pay it back over time. You can also request that funds be transferred to your bank account.

4. Earn rewards as you make payments

Typically, you earn credit card rewards as you spend, not as you pay down your balance. But with the Perpay Credit Card, you’re rewarded only when you make payments. While it’s unusual, it makes sense that a card meant for credit-building would incentivize paying your bills diligently.

The Perpay Credit Card earns 2% back on all payments. However, it’s not in the form of cash back — you can redeem rewards only for merchandise from the Perpay Marketplace.

5. The fees really add up

While there’s technically no annual fee, you’ll still pay more than $100 a year to carry the Perpay Credit Card. There’s a $9 one-time account opening fee and a $9 monthly account service fee (that’s $108 per year). If you want a metal version of the card, that’ll run you an extra $19.

Let’s say you don’t get the metal card, so your first year will cost $117 in fees. You’d need to spend $487.50 a month to earn enough rewards to offset that expense (depending on your situation, that may exceed your credit limit with the card).