In this brief guide, we define what a credit builder card is and how getting one can potentially help you build your credit.
What are Credit builder credit cards?🌿🌳
Credit builder cards are exactly what they sound like. Credit builder cards help people with little credit histories and low credit scores build credit. They come with High APRs, Low credit limits and accept people with low credit scores. Credit builder cards help you boost your credit score if you make the monthly repayments on your credit builder card on time each month.
You can see what credit builder cards you are eligible for and apply through a credit card eligibility platform.
As with all credit cards, ensure you make at least the minimum payment as this will help boost your credit score. You should also use no more than 30% of your available credit limit on any credit card as this will make you seem more in control of your finances.
A credit builder credit card may be relevant for you if:
You’ve had problems with debt in the past
There’s an unpaid bill under your name
You previously went bankrupt
You have a county court judgement (CCJ) against your name
You aren’t on the electoral roll
You have no history of borrowing or have never had a credit card
Why is your credit score relevant?
Your credit score is very relevant as it determines what APR lenders will charge you for credit.
If you are unsure of what your credit score is then you should check your credit score from the four credit bureaus in the UK: Experian, Crediva, Equifax and Transunion.
Some of these credit bureaus may charge you a fee to view your credit report so what you can alternatively do is request a statutory credit report which is a free credit report which each credit bureau must provide to you upon you requesting it.
Alternatively, you can also use credit score services such as Checkmyfile and clearscore to check your credit report.
Once you have checked your credit report you may see that you have a low credit score and if this is the case then a credit builder card may be the best option to improve your credit score by giving you the opportunity to show good credit behaviour through making your monthly credit repayments on time.
Advantages of a Credit builder card
Some of the advantages of a Credit builder card are listed below.
Credit cards have payment protection cover:
Due to the consumer credit act all goods purchased using a credit card which are over £100 are covered by the payment protection scheme. This means if goods are faulty or were not delivered, then your credit card provider must refund you. This cover does not apply to two seperate transactions not amounting to £100 separately, even if they were bought in the same store.
Credit builder cards help build your credit score:
Credit builder cards help build your credit score as they reflect how often you repay your monthly credit card debt on your credit file. They also reflect your credit utilization( this is how much credit you use in relation to your credit limit) and a low credit utilization will aid your credit score whilst utilizing your credit to its limit will reflect negatively on your credit file.
Access to emergency fund
Credit builder cards help by providing you access to emergency funds in case you have any financial emergency which requires immediate help. This may be a cheaper method of borrowing than payday loans or other alternative short term finance.
Some Credit builder cards will have interest free periods which are long enough for you to put your finances in order before you start repaying any credit card balance you owe.
Pay for expensive items
Credit builder cards allow you to buy more expensive things which you may need and spread the payments over a long period. This could be things such as paying a down payment on your rental accommodation.
No annual fees
Most Credit builder cards do not have an annual fee.
Easy to qualify for
Most Credit builder cards are very easy to qualify for as they are targeted towards people with little or no credit history.
Disadvantages of a Credit builder card
Some of the disadvantages of a Credit builder card are listed below.
Credit builder cards are a bit restrictive:
They tend to offer lower credit limits(usually around £500) and higher APRs are standard. Some may see these are prejudice terms and there might be some truth to that. Credit builder cards also have higher minimum payments: these are the minimum you must pay back every month to ensure your credit card provider does not charge you any fees.
Note: Although paying the minimum payment will prevent you from incurring any further charges you will still get charged interest on the difference between your minimum payment and what you owe per month. This could easily turn out to be very expensive for you and should be avoided at all cost.
Avoid the ATM:
Using your credit card at the ATM will incur you huge fees up to 3% of your withdrawal and there are no interest free periods for using your credit card at the ATM. This is even made worse if you use your credit card at a foreign ATM as not only will you incur this charge you will also incur an exchange rate charge.
The APRs on Credit builder cards are much higher as the credit card providers see this area as a very risky area as most people won’t have a full-time job and they may not be able to pay back what they have borrowed. To compensate or to balance the books the high APRS are charged so those who pay back could essentially cover the costs of those who borrow on their credit cards but don’t payback.
Rejections can damage your credit score.
Because getting rejected for any credit application can damage your credit score you should only apply to credit cards which you are sure you will be approved for.
Alternatives to a credit builder card
Some alternatives to a credit builder card could be:
A credit builder loan
A credit builder loan is a loan which you take out that allows you to build up your credit history by making regular monthly loan repayments. When you take out a credit builder loan you aren’t actually given a loan advance but instead, you make monthly contributions which are repaid to you at the end of your “loan term”. By making these loan repayment on time your credit score should rise. Loqbox is a credit builder loan provider in the UK.
A secured credit card
A secured credit card has the same features as a credit builder card but instead, a secured card requires you to put a deposit which is equal to the credit limit or percentile of the credit limit as security before the credit card provider will give you the credit card. This secured deposit helps reduce the credit card providers risk if you default on your monthly credit card repayments.
Do credit builder cards work?
Yes, credit builder cards work and are quite effective as long as you do not continue any bad credit behaviour which may drag your credit score lower. A credit builder card works by allowing you to have a credit account which you must make regular monthly repayments to(if you borrow from it). By making these regular repayments on time your credit score should rise.
When using a credit builder card you should follow the good credit tips listed below:
Do not close any credit accounts
Register to be on the electoral roll at your current address
Avoid missing any credit repayments
Avoid making any late credit repayments
Your credit utilization should be less than 30%
Avoid getting rejected for credit applications
How to get a credit builder card?
You can get a credit card builder by using a credit card eligibility checker to see what credit cards you are eligible for.
In this brief guide, we discussed credit builder cards. If you have any further comments or questions then please let us know.