What is a credit building credit card?
Credit building credit cards - also known as ‘bad credit’ credit cards - are designed for people who find it hard to get regular credit cards.
This could be because they have a poor credit history. Maybe they have taken out too many loans and found it hard to repay them. Or they have no credit history, usually those who have never borrowed before. You can find out more about getting your first credit card here.
Banks and credit card companies use your credit history to decide if they will lend you money. A credit builder credit card can help you build or rebuild your credit history. This can help you get accepted for the best loan and credit card deals in future.
How do credit builder cards work
Credit builder credit cards work by giving you the chance to show a credit card company that you can repay your debts in full and on time. Doing this improves your credit score.
Credit card companies charge higher interest rates on credit builder cards. They also have lower credit limits. This is because they think there is a risk you won’t repay them.
Avoid paying any interest on what you spend on your credit builder credit card by paying what you owe in full every month. Over time, this will also improve your credit history. It shows you can take control of your finances. So in the future, banks and lenders will be more willing to offer cheaper credit products.
Why would you need a credit building credit card?
Credit builder credit cards can offer the best option for people who need to improve their credit history.
People with a poor credit history may be locked out of the best deals from regular credit cards and loans. Improving your credit score can make these deals available in future.
You may need to improve your credit score for a few reasons.
Problems with debt: You may have previously taken out lots of loans or credit cards and found it hard to pay them back on time. Missed repayments can damage your credit score.
Bankruptcy: If you were in so much debt you were unable to pay it back and went bankrupt, this will harm your credit score. Banks and credit card companies will be hesitant to lend to you.
Unpaid bills: Unpaid bills, for example for mobile phone contracts, can show up as debts on your credit score.
You have a county court judgement (CCJ): You may get a county court judgment or high court judgment against your name if someone takes court action against you saying you owe them money, and you do not respond. If you get a judgment, this means that the court has decided that you owe the money.
You don’t vote: Being on the electoral register allows you to vote but also looks good on your credit file. If you aren’t listed, or haven’t updated it with your current details, it can harm the credit score banks and credit card companies use to decide if they will lend to you.
No credit history: If you have never borrowed any money you may not have any credit history. Banks and credit card companies are wary of lending to people without a credit history. It is hard for them to tell if you will pay them back.
How to compare credit building cards
Compare credit building credit cards online using credit card comparison websites to get the best credit builder credit card offers for you.
Credit building credit cards charge higher interest rates - the annual percentage rate or APR - than standard credit cards. So credit building credit cards will never be the cheapest on the market. But it is worth shopping around to find the lowest APR offers for you.
Don’t apply for lots of credit builder credit cards at one time. Every application goes on your credit history and can harm your credit rating.
Ask credit card companies for a “soft quote” first to see if you are likely to be accepted. If they refuse, consider applying elsewhere.
Different credit builder cards offer different rewards or services. Compare the APR first to find the cheapest credit card for you, then look at the extras.
For example, some credit builder credit cards let you track your credit score so you can see it improve. Others have an app that breaks down your spending patterns.
How to improve your credit score
Getting a credit builder credit card and making sure you meet all the repayments is a good way to improve your credit history.
There are also other ways to get your credit rating back in good shape.
Pay your bills in full each month
Paying your credit card and other bills in full each month looks good on your credit score. It shows you can be responsible with money. If you can’t pay back the full amount on your credit card every month, at least be sure to pay the minimum on time.
Have bills in your name
Make sure to have some bills in your name, for example gas and electric bills. If you live in a shared house this can be tricky. Having just one bill, like broadband, in your name will help. Paying bills in your name adds to your credit history in a good way that shows you can stick to financial commitments
Get on the electoral register
Banks and credit card companies check your credit history before lending to you. Being on the electoral register helps them confirm your name and address, so your rating will improve. Remember to update your address details on the electoral register when you move home.
Being on the electoral register can also save time when you apply for credit. If lenders can’t confirm your details via the electoral roll, they may ask for other forms of identity and proof of address. This can delay your application.
How to get the best credit cards to build credit
Credit builder cards typically don’t offer a whole lot of features or add-ons. So when comparing credit builder cards, the three things you want to focus on are:
Minimum credit limit
Maximum credit limit.
While credit builder cards charge much higher interest rates, if you pay off your balance in full each month, you won’t be charged any interest. This can be easier to do because credit builder cards have much lower credit limits ranging from £50 to £250.
It’s important to keep up with repayments, as even missing a single payment can damage your credit score further, which defeats the purpose of getting a credit builder card in the first place.