You may have been looking at credit builder cards to help you rebuild your credit rating. But are they really good for your financial health?
When you’re trying to access credit for any reason, for example applying for a mortgage or preparing to make a large purchase such as a car, you’re likely to find it difficult to be approved if your credit rating isn’t very good. If you have limited credit history, you’ll also probably be penalised. So what can you do about it? How can you improve your credit rating to be successful when applying for loans, credit cards, or other forms of credit in the future?
One Option Is To Get A Credit Builder Card
So what is a credit builder card? It’s a type of credit card that can be used to improve your credit score, it’s that simple. When you use one of these cards, you’ll build or rebuild your reputation with credit reference agencies/lenders. This can, and hopefully will, increase your chances of successfully applying for loans, credit cards with lower interest rates. And eventually, should you want one, it should be easier to get a mortgage.
If credit builder cards are used correctly, you can improve your credit score really quickly, sometimes within just four to six months.
Why Credit Builder Cards A Good Idea
Firstly, the positives.
- They can help you build your credit history. When you use a credit builder card responsibly, you’re demonstrating to lenders that you’re able to borrow money and repay it on time. This can help you improve your credit score, which will in turn make it easier to qualify for loans and other forms of credit in the future.
- People with poor credit ratings are more likely to be approved. If you have a poor credit history, you may have a hard time getting approved for a traditional credit card. However, credit builder cards are designed precisely for people in your position, so you’re more likely to be approved for one.
- They have lower interest rates than other types of credit cards. The interest rates on credit builder cards are typically lower than the interest rates on certain types of credit cards, such as reward, store, or travel cards. This means that you’ll pay less interest on your purchases if you use one.
- They’re a good way to learn how to manage credit. If you’re new to credit, a credit builder card can be a good way to learn how to manage credit responsibly. You’ll learn how to set a budget, track your spending, and make on-time payments.
- Credit builder cards are a great option for those starting from scratch with their credit score. If you’re thinking about getting a mortgage or taking out a loan in the not-too-distant future using a credit builder card first can make your life much easier.
The Negatives To Credit Builder Cards
We would be doing a disservice if we didn’t point out the drawbacks and negatives to credit builder cards. Thankfully, there are few, providing you stick to some basic rules.
- They typically have lower credit limits than other types of credit cards. This means that you won’t be able to borrow as much money with a credit builder card (but this could be seen as a good thing).
- Additionally, the interest rates on credit builder cards can be higher than the interest rates on other normal types of credit cards, such as Visa and Mastercard. (Other cards are, of course, available.)
- Not everyone will qualify for a card. Use an eligibility checker before applying, as each time you apply for credit, it’s usually recorded. Multiple attempts to gain credit will impact you negatively.
How Do Credit Builder Cards Actually Work?
Using one of these cards will feel just like using any other credit card. Each time you spend, you’re borrowing from the credit card provider and you pay this back each month. Your credit limit is the maximum that you can borrow, and if you don’t pay your borrowing in full, you’ll be charged interest on the balance.
By clearing your balance each month, you’ll not only avoid paying interest, but you’ll be demonstrating that you’re reliable. You’ll be showing your card provider, and in turn the credit reference agencies, that you can handle credit well. This is what will get your credit score rising.
The Basic Rules You Need To Follow To Improve Your Credit Rating
- You should only spend what you can afford to pay off in full each month. These cards shouldn’t be thought of as a way to just hit the shops and go on a spending spree. The point is to show you’re responsible.
- You must make your payments on time, every month. Paying late will cause you further problems and you may incur additional fees. Setting up a direct debit for the minimum payment amount due is helpful if there’s a chance you may forget or miss a payment (but also pay the rest of the balance if you can).
- It’s essential that you don’t exceed your credit limit. One of the markers that credit agencies use is to check how much of your available credit you’re using. For example, if you have a card with a £500 limit and you keep the balance near that figure, it won’t be looked on favourably.
- Don’t use your card to withdraw cash. It’s expensive due to charges, and a red flag to lenders.
- Check your credit report regularly to ensure there are no errors showing, as this can affect your credit rating. There are several ways to do this, such as using the ClearScore or Experian apps.
Which Card Should I Apply For?
If you’re new to credit, you’re probably better off applying for a card at a bank. Many of the main banks offer credit builder cards – if you have a bank account, check with your own bank first to see what their options are. Alternatively, do some research online to look at other card suppliers. Sainsbury’s, Asda, Capital One, The Post Office and Virgin Money are just a few of the companies who offer credit builder cards.
If you’re attempting to rebuild your credit score, you could apply for something like the Vanquis card (others are available, but this one is recommended). Vanquis has an overall rating of 4.4/5 on Trustpilot.
Finally …
Overall, credit builder cards can be a good way to build your credit history and improve your credit score but it’s important to use them responsibly. Make sure that you understand the terms and conditions before you apply for one.
We hope the information provided here is useful for you; if so, please leave your feedback in the comments.
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