Signing up for a new credit card might not seem like the most sensible approach to take if you are in financial difficulties. But for people who have a history of missed repayments or loan defaults, there’s a type of card that is designed to help them improve their chances of borrowing at reasonable rates again in the future.
What are credit builder cards?
These are known as credit-builder or credit-building cards. They are aimed at people with poor credit scores and they essentially give such borrowers the chance to demonstrate that they are capable of borrowing responsibly and paying off their debts on time.
How to improve your credit report.
Why would I think about getting one?
Most adults in the UK have some form of credit record held by a credit-reference agency – the main ones are Equifax, Experian and CallCredit.
A credit record is a report that details who you are, where you live, who else lives at your address, as well as what credit deals you have taken out over the past few years.
Most importantly, the record shows whether you have repaid any loans late or defaulted entirely, and it is used by banks – as well as landlords, mobile phone companies and even prospective employers – to verify your identity and check your creditworthiness.
If you have a poor credit score, you’re more likely to be turned down for the likes of personal loans, mortgages or standard credit cards. But a credit-builder card can help you improve your credit record so that, after a while, your score will improve and you stand a better chance of obtaining mainstream credit.
Use Experian's free 30-day trial to check your credit report for unusual activity and unauthorised credit that has been taken out in your name*
*A monthly fee of £14.99 applies after your 30-day trial – you can cancel at any time during your trial with no charge. New customers only.
How do credit-builder cards work?
A credit-builder card works in much the same way as a normal credit card – you use it to make purchases, and are then charged interest on any balances you don’t repay the following month.
But the terms and conditions on credit-builder cards are likely to be much stricter than usual – this is due to the fact that these cards are aimed at people who have shown themselves to be higher-risk borrowers, from a bank’s point of view, in the past.
For example, credit limits on credit-builder cards tend to be much lower – in some cases you could be restricted to borrowing no more than a couple of hundred pounds initially, although this limit could subsequently be increased. The interest charged on the money you borrow with a credit-builder card is normally considerably higher than on standard cards – APRs (annual percentage rates) can often be as high as 40%, if not more. This means it is important to clear your debts in full as soon as you get your monthly bill in order to avoid interest charges.
Provided you pay off any debts on time and always make your minimum monthly repayments, you may see your APR fall over time.
How to protect your credit record.
Could they work for me?
Overall, credit-builder cards are not particularly attractive when compared with mainstream forms of borrowing. But for people with damaged credit histories they’re often the only way to re-establish a good credit record and eventually regain access to standard loans, mortgages and cards.
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