If you have a poor credit score or no credit history at all, it can be hard to get accepted for credit-based products such as credit cards, personal loans or even energy or mobile phone plans.
However, a credit builder credit card is specifically designed to help people improve their credit score over time.
In this guide we take a look at how credit builder credit cards work and what to watch out for.
How do credit builder credit cards work?
Credit builder credit cards aim to help borrowers repair, improve or ‘build’ their credit score.
When you apply for credit, lenders look at your credit score to decide how reliable or risky you are as a borrower and whether they want to lend to you. If you have a poor credit score, you’re less likely to get accepted for the top credit cards, and if you do get accepted for credit, you’ll usually pay a higher rate of interest.
(If you see an interest rate advertised on a loan or card, it only has to be offered to 51% of successful applicants. The rest can be charged a higher amount.)
With a credit builder credit card, however, acceptance criteria are generally lower, which can make this type of card a good option if you can’t get credit elsewhere.
Credit builder cards typically have low credit limits and high interest rates, but if you use your card sensibly – in other words, you pay on time each month and don’t go over your limit – you can start to rebuild your credit score.
This can help you to get accepted for more competitive credit cards (as well as other forms of credit) in the future.
Who are they suitable for?
Credit builder credit cards can be a good option if:
- you have no credit history (ie you’ve never had access to credit before)
- you have a low credit score
- you’ve previously filed for bankruptcy
- you have a county court judgment (CCJ) against you
- you’ve had debt problems in the past.
What are the advantages?
Credit builder credit cards can help you to improve your credit score and prove to lenders you’re a responsible borrower.
Providing you pay back what you borrow on time and stick to your credit limit, your credit score should start to increase after several months and you may be able to apply for more competitive offerings in the future.
Some credit builder credit cards also offer incentives such as cashback, vouchers or 0% interest on purchases for a few months – but it’s important not to be too swayed these and make sure you only spend what you can afford to pay back.
If you do not pay off your balance each month, your score is unlikely to improve – and you’ll be charged a high rate of interest on the debt.
What should you look out for?
Before applying for a credit builder credit card there are a number of points to be aware of. These include:
Low credit limits
Credit builder credit cards typically have a low credit limit – often somewhere between £150 and £1,200. Although this should prevent you from building up too much debt, you’ll need to take care not to go over your limit. If you use your card carefully, your credit limit may increase over time.
High interest rates
Interest rates on credit builder credit cards are typically much higher than for standard credit cards – usually somewhere between 27% and 39.9% APR. To avoid paying this, it’s important to clear your balance in full each month and only spend what you can afford to repay.
0% offers
A few credit builder credit cards offer introductory interest-free deals on purchases for a short space of time, often around three months.
But while this can be beneficial – as you’ll be able to spread the cost of your spending without paying interest for a set time – it’s important not to get carried away and to only spend what you can afford to pay back. Remember, once the 0% deal ends, you’ll start paying interest.
Minimum payments
Monthly minimum payments are usually set at low levels – often around 1% to 2.5% of the balance. Only paying this amount each month means it will take you a long time to pay off your debt and you’ll pay more interest overall.
Try to pay off more than the minimum monthly repayment if you can – ideally, the full balance.
Penalties for missed payments
If you are late with a monthly payment or miss it completely, you’ll have to pay a fee and you also risk hurting your credit score even further. To ensure this doesn’t happen, set up a direct debit to clear the balance each month.
Qualifying criteria
Although it can be easier to get accepted for a credit builder card compared to standard credit cards, you’ll still have to meet certain criteria. For example, there may be a minimum income requirement and you often won’t be accepted if you have had a CCJ within the past 12 to 24 months.
Some providers also stipulate that you can’t have been registered bankrupt within, say, the past 18 or 24 months. So make sure you check carefully before you apply.
Cash withdrawal charges
Always avoid using your credit card for cash withdrawals unless it’s an emergency. If you do, you’ll be charged a fee of around 3% of the amount withdrawn, plus interest on top.
Interest is charged from the moment you get your cash, even if you pay off your balance in full that month, making it an expensive way to borrow.
Is a credit builder card right for you?
If you are thinking about applying for a credit builder credit card it can be worth checking your credit score first using an online tool.
That way you’ll be able to assess exactly what your credit report looks like and check whether it contains any mistakes. If it does, make sure you get them corrected as soon as possible as this can affect your credit rating.
You may also be able to add a ‘Notice of Correction’ to your credit report. This is a 200-word statement that explains why you missed a payment if it was a one-off – for example, if you lost your job or fell ill and couldn’t work – and it can help lenders to look more favourably on future applications.
If there are no mistakes on your credit report, there are other steps you can take to improve your credit score. These include:
- registering on the electoral roll (if you haven’t already)
- paying bills on time
- spacing out credit applications by at least three months, preferably six
- keeping your credit utilisation low (this is how much of your available credit limit you use – around 30% is best).
- Before you apply for a card, it can also be worth using an online eligibility tool as this will show you how likely you are to be accepted for a credit builder card without harming your credit score.
Are there any alternatives?
If you’re not sure a credit builder credit card is right for you, another option is a prepaid card with a credit builder facility.
Prepaid cards allow you to load them up with cash and you can then spend on the card as you would with a credit card or debit card. The main advantage is there are often no credit checks with this type of card and no minimum income requirements, so it’s highly likely your application will be accepted. Just be aware there may be a sign-up fee to pay.
If you choose to add a credit builder service to your card, the provider will lend you a year’s worth of monthly payments, which range from £5 to £10. You will then be asked to repay this over 12 months and as you do so, your credit rating will improve.
Note that this ‘loan’ can’t be used for purchases as no money will actually change hands – it’s simply there to be repaid and to show future lenders you’ve borrowed responsibly in the past. But it can be a useful way to improve your credit score if you’ve previously struggled to get credit.