Credit Builder Cards Explained
But in order to get the cheapest deals with the best interest rates, lenders will expect applicants to be financially stable and have a near-perfect credit history with no previous missed payments, whereas people who seem more risky to creditors will be offered more expensive deals with higher APRs, or they may even get rejected altogether.
One way to improve your score is to get a credit builder card, and this guide will explain all you need to know about how it works so that you can make an informed decision.
What is a credit builder card?
A credit builder is a type of credit card that helps consumers improve their credit score and history, either because they have a bad credit score due to past financial decisions and risk having their application rejected, or because they are new to borrowing and need to start building it up from scratch.
Generally, your credit score says a lot about how you handle and manage money, such as whether or not you pay credit card repayments on time and in full, which is why lenders use this as their main method of assessing risk.
So if you want the best deal on a loan or credit card, you need to work on maintaining your score if it’s good to excellent, or improve it if it is below average, and a credit builder card is one way of tackling this.
Read more: 10 Ways to Improve Your Credit Rating
Do I need a credit builder card?
If any of the following applies to you then you may want to consider getting a credit builder credit card to help improve your chances of being accepted for credit:
- You are aged between 18 and 25 years old and you want to start building your credit history from a young age.
- You have never borrowed money or had a credit card before.
- You can’t get credit because you are not a homeowner and/or your income or occupation does not meet the acceptance criteria.
- You have a low credit score and a poor credit history due to problems with debt or because you have missed payments in the past.
- You experienced bankruptcy at some point in the last six years, which is marked on your credit report.
- You have a criminal conviction or Country Court Judgement (CCJ) on your credit file.
It's worth noting that compared to other types of credit cards on the market, a credit builder is unlikely to come with any introductory offers for new customers and it won’t provide cashback or rewards on purchases.
If you’re unsure what your credit score is, we highly recommend that you check it straight away and look at anything on your report that might be holding you back.
Get a detailed report and a more accurate score with Checkmyfile today (30-day free trial), a credit-checking website that provides data from all main credit reference agencies in the UK (Experian, Equifax, TransUnion, Crediva), which lenders use to check your details.
How to use a credit builder card
So, how does this type of credit card work?
As a credit builder is mainly used by people who have low credit scores and poor financial histories, the interest rate (APR) is more than likely going to be high, meaning that you will get charged a higher amount of interest on top of your outstanding balance every month (compared to other types of credit cards).
The main reason for applying high-interest rates is to account for the high-risk spender, so the lender will charge more to help lower the risk of lending money to someone who has a history of missing payments or not paying them in full.
Tip: You can avoid paying interest by paying each monthly repayment in full.
If you want to improve your rating with a builder card and avoid paying interest on top, you must keep up with each monthly balance; if you don’t, you will be spending more overall in the long-run, and any missed payments will further damage your chances of applying for credit in the future.
If you’re struggling to pay the full balance, make sure that you at least pay off the minimum repayment amount, as this will have a serious impact on your score and future applications.
Credit builder cards also usually come with low credit availability, meaning that cardholders are limited to the amount they can borrow. Again, this is to lower the risk for the lender and to prevent you from spending more than you can afford to repay.
It’s worth noting that how you utilise your credit limit can also hinder your credit score. Generally, it is advised that you only use 25% or less of your credit availability, as using more can make you seem like you’re struggling financially.
For example, if your credit card limit is £1000, try not to spend more than £250 every month (and always make sure you repay the full amount, if you can).
Tip: If you want to make sure you meet every monthly payment, set up a direct debit with your lender.
How does a credit builder card improve your credit score?
As mentioned previously, by using your credit builder card responsibly and paying off every monthly balance in full and on time, this will help to improve your credit score over time.
It is important to be patient with this, though, and remember that it isn’t going to be a quick fix. Depending on your score and the severity of any negative markings on your credit history, it could either take a few months or up to a year - even a few years in more severe cases.
But by making every payment in full, this will show up on your report and will help you seem more financially reliable to lenders, and in the future, you’ll be eligible to apply for better deals with higher credit limits. And remember to keep your credit card utilisation low, too.
Is a credit builder card my only option of improving my credit score?
No, there are many other ways that you can try to bump up your credit score and prove to lenders that you are able to manage credit and repayments sensibly.
As mentioned, the main way to improve your score is to make any credit repayments on time, but if you do this with all of your other bills too, whether that’s your energy bills or mobile phone contract, this could also help prove to credit reference agencies and lenders that you’re improving the way you manage your money and hopefully, your credit score will increase as a result.
You can also try the following:
- Make sure you’re on the electoral register.
- Check your credit score and report regularly, so you can address any potential errors straight away.
- Avoid making too many applications for credit in a short space of time as this will hurt your credit file.
Find out more in our guide: How to Improve Your Credit Score
How to get a credit builder card - Final tips
Firstly, make sure you compare a range of credit builder card deals online to see what is on offer, compare the interest rates as well as the benefits, and be aware of the eligibility criteria. This will help you identify the best deal for you.
Once you have found a good credit builder card deal that you want to apply for, be sure to check your credit score beforehand so you have an idea of your eligibility.
Despite the fact that credit builder cards are an option for people with a low credit score, if you don’t check it and it is lower than what the lender's criteria requests you to have, the lender may reject your application, and this will be recorded on your report and will subsequently bring your score down.
Also, remember not to make more than one application at the same time, as this will tell lenders that you’re desperate to lend money and they’ll see this as a warning sign, so they may refuse to lend to you. Then, any damage to your credit score and report will hinder your chances of applying for credit in the future.