You might have a low credit score because you’ve had financial difficulty in the past, or because you haven’t ever borrowed money. When a company looks at your credit file to assess whether to give you a loan, they look at how you’ve dealt with borrowing previously. If you haven’t managed your debts well, a lender will think twice about giving you a loan.
It’s the same for first-time borrowers. Because there is no searchable history, a lender can’t tell if you are a responsible borrower or not. One solution is to build up your credit rating and you can do this with the help of a ‘credit builder card’.
What is it exactly?
This type of card can be offered to you even if you have a County Court Judgement or Bankruptcy Order on file, as long as more than a year has passed. It’s worth noting that bankruptcies and County Court Judgements that weren’t paid off within a month stay on your credit file for six years, so a lender will be aware of this.
What are the interest rates?
Interest rates on this type of credit card are high. That’s because they are given to people that have a higher risk of not making the payments. But, if you use the card properly the interest rate shouldn’t be an issue.
What do you mean use it properly?
Use your credit card responsibly and pay off the amount you owe on it every month. Don’t use it to spend money you want to pay back slowly. Spending up to your limit and then paying the minimum fee each month is a big mistake. It means that you’ll pay a huge amount of interest and your credit won’t improve.
So, how do I use it?
Pick a bill you normally pay every month and then use your credit card to pay it. Keep the money for the bill in the bank and use it to pay off the credit card each month. Try not to spend too much. Finally, the most important tip of all, make sure your payments are always made on time.
What are the risks?
There may be a temptation to buy yourself something expensive using the card with the intention to pay it back at the end of the month. However, if something happens and you can’t, you’ll accrue more debt and potentially ruin your attempts to improve your credit rating. Also, never use the card to withdraw cash. Firstly, because interest rates are high and there is a service fee. Secondly, because your card lender won’t see cash advances as responsible borrowing.
Are there advantages to having a credit builder card?
If you’re patient, use the card regularly and pay it off in full each month; your credit rating will improve. By the time any bad debts are wiped from your file, you should have built up a good rating which will help you to secure credit in the future. Don’t forget, credit doesn’t only include borrowing money; it also includes other credit agreements such as phone contracts or insurance policies.
What sort of credit limits do credit builder cards have?
The credit limit on these cards is normally quite low. Most start at around £250 and go up to around £1,200. It is much better to start off with a low credit limit because if you are tempted to spend, you are prevented from being irresponsible.
Who uses a credit builder card?
Anyone who needs to build up their credit. This can be someone who has only just opened a bank account and has never had a credit agreement in their name such as a student or even people who have been made bankrupt, but are now discharged. Also, they may be useful for anyone who has defaulted on a debt or has a County Court Judgement.
Do they offer other benefits?
Yes, some credit builder cards will offer you 0% interest for a fixed period, however, if you want to build up your credit rating, you’ll need to pay it off monthly anyway. Other cards have cashback incentives which usually peak at a maximum of about £100 a year. If you go abroad, there are also cards that don’t charge a fee for spending while you’re away, which is useful in an emergency.
How long does It take to improve my credit score?
It won’t happen overnight, so you need to wait a while. It usually takes about a year before you’ll see an improvement. That’s if you have treated your credit carefully and made payments on time.
How can I see if my credit score is better?
You can apply to look at your credit file. There are three main credit agencies you should contact: Callcredit, Equifax and Experian. You can get you get your file for £2. Don’t be surprised if each agency has given you a different score, this is normal as they all use a different method to calculate it. They will be close, but they won’t always be the same.