I had spoken about Koho on Wealth Awesome before and mentioned that their Mastercard is a great hybrid between a debit and a credit card.
You can avoid high credit card fees, fraud, and lousy credit while reaping the spending power and cashback benefits of a credit card.
Better yet, you do not even need a good credit score to be eligible for this card, especially as it’s prepaid and overspending on it is impossible.
Despite some of the great features of this card, however, many are concerned about being able to build their credit score while using the Koho Reloadable Prepaid Mastercard.
If it’s more like a debit card with cashback, does Koho build your credit?
The answer is yes but with a caveat; the Koho Reloadable Prepaid Mastercard alone does not build your credit score without additional features. This is because you are not technically using credit (i.e. borrowing the money) when using your card as you would with a traditional credit card.
The Koho card is prepaid and reloadable, meaning it is secured, and you cannot spend more than you deposit. However, it is possible to opt for a credit-building feature with Koho at a monthly cost of $7.
With this subscription, Koho representatives report your financial progress to a major credit bureau, potentially helping users build or rebuild their credit score within a mere six months.
Let’s get into the details of what Koho is and whether it can help you in your financial journey by building your credit.
What is Koho?
Koho is a financial app developed by Daniel Eberhard that features a free chequing and saving account.
The product was launched in 2017 and aims to simplify credit cards and personal finance for consumers through an easy-to-navigate and high-quality mobile application.
Koho is not a registered bank and cannot necessarily replace your current bank. However, it can assist you in managing your finances more effectively and help you stop worrying about overspending and adverse effects on your credit score.
The company’s main offering is its reloadable prepaid Mastercard. You simply transfer funds to your Koho spending account using their app (follow these steps on how to do that) and use your card as a Mastercard Debit at point-of-sale machines.
Their spending account is similar to a free chequing account, except it pays interest on its balances (like a savings account) and gives you cashback (like a credit card). So it’s a true hybrid.
It’s important to note that Koho is not lending you any money in this process; it is just providing the vehicles for you to effectively spend and store your money through their app.
As such, your spending via the Koho reloadable prepaid Mastercard card does not affect your credit score. Why? Because only the activities in which you borrow capital or make timely payments affect your credit score.
As I mentioned, Koho has a special feature that allows you to build your credit score. I think this feature is great, and I will go into its details after touching on the importance of having a good credit score.
Why Do You Need a Good Credit Score?
Your credit score reflects your financial health and previous habits when it comes to your debt payments, that is, your creditworthiness.
When you apply for a credit card, loan, or mortgage, financial institutions will refer to your credit score to determine whether or not they want to take the risk to loan you any money or, if they do, determine the terms of your loan.
A low credit score may result in you having limited access to financial products such as credit cards and mortgages.
It may also result in loans that have higher-than-usual interest rates. All of this is based on the discretion of the lender and their risk portfolio.
Some things that negatively affect your credit score are missed credit card or loan payments, filing for bankruptcy, using a large proportion of your credit card limit (i.e. your credit utilization ratio), carrying a balance on your credit card and regularly applying for or closing credit cards.
Changes to your credit score are not instantaneous but do note that your financial activities do have some sort of effect on your credit score, whether for the better or worse.
If you want to preserve your creditworthiness, you must be aware of these factors and make sure you are in sound financial health.
If you want to know more about your credit score, you can check out this post on how to learn your credit score for free.
Koho’s Credit Building Feature: Improve Your Credit Score
Although Koho does not function as a credit lender, you do have the option to use their Reloadable Prepaid Mastercard and build your credit score at the same time.
This is a part of their “credit building” offering, where you can grow your score and your financial opportunities at a monthly cost of $7.
Once you sign up, this is a cost that is automatically deducted from your Koho savings account.
Ensuring that you have enough funds to cover this cost on the date that the charge hits your account is crucial. Not having the $7 in your account will negatively affect your credit score.
Once the payment has gone through to Koho, the company will report that you are “in good standing” with them to a major credit bureau, which, when done consistently, will increase your credit limit in a matter of six months.
If you are a part of this program, you’ll be able to see your credit score on the Koho app and can track your progress month by month.
There is no requirement to join the program other than paying the monthly fee, which is $7. That is, even if your credit score is very low, you will be able to join this program and move closer to your financial goals.
Do note that Koho conducts a “soft credit check” upon your application for this feature, which is a very top-level depiction of your financial history.
A soft credit check does not negatively affect your credit score (as other types of credit checks might.)
Important: please do note that the credit building feature is not available in Saskatchewan for the time being.
Does Spending Build Credit?
Spending does not affect your credit score.
Many financial experts suggest that you do not overspend and only use about 30-35% of your credit card credit limit each month.
If you are using more than this percentage per billing cycle, I would recommend applying for a credit limit increase through your card provider or using cash/debit cards more often.
What is more important than maintaining a low credit utilization ratio is making your credit card payments on time.
Even if you rarely use your credit card, I would recommend making small purchases on your card each billing cycle and paying them back on time so that you can consistently prove your creditworthiness to financial institutions.
Alternatively, you can also use your credit card for monthly subscriptions (such as gym memberships or streaming services), which also tend to help your credit score over the long run.
In short, spending in itself does not build credit, but spending about 30% of your credit limit and paying it back on time can assist in building your credit score over time.
If you are not eligible for a credit card for any reason, you should consider getting a secured credit card or signing up for Koho’s Reloadable Mastercard so you can reap the benefits of a credit card.
If you go with Koho, I would also definitely recommend their credit-building feature.
The downside to secured credit cards is that you will be required to put down a deposit (usually somewhere around $250 to $1000) before you can use your card.
If you’d like to avoid this or are strapped for cash, Koho’s credit-building feature can be a better route. Just ensure that you have the $7 in your account each month, and you will be good to go!
Koho can, in fact, help in building your credit score, but only if you sign up for their credit-building program. This program has a monthly cost of $7, which is deducted from your account each month.
Not having this $7 in your account will negatively affect your credit score. As such, it is crucial to stay on top of this payment so you can build and track your credit score over time.
I’m a fan of Koho and appreciate this credit-building feature. I know it can be pretty hard to build your credit score, especially if you’re new to Canada or have had a complicated financial past, but I believe that this program can eliminate the barriers to financial inclusion.
I have done a full review of Koho before, which you can find here. It also tops my list of the best virtual credit cards in Canada. And if you’re already a customer of Koho and looking for innovative ways to transfer money to your account, check out this how-to transfer money to Koho post.