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Everything You Need To Know About Credit Builder Credit Cards

So, you’re thinking about taking out a credit builder credit card… yeah? We thought so. Andddd… you want to improve your credit score, right?

You could call us psychic, but we’re guessing it’s the reason why you’re reading this article! So let’s get down to the nitty gritty. We’re here to tell you everything you need to know about credit builder credit cards. Starting from the beginning…

What is a credit builder credit card?

It might be obvious given the name, but a credit builder credit card can be a good way to grow your credit score from scratch. Whether you have no credit score or just a very low one, this type of card could be a great tool to fix it. But here’s the thing – without trying to sound like your mum giving you a lecture – you have to use it sensibly to reap the rewards!

But before we get into it, let us interrupt ourselves for a sec. If you’re wondering what is a credit score and why is it important, we’ll quickly explain. A good credit score is important if you want to take out credit – whether that’s a loan, mortgage, car finance etc. It means you’ll be much more likely to get approved and therefore able to do the things you want and achieve your goals. Not only that, but a good credit score usually results in a better interest rate and that means LESS TO PAY BACK overall. Win.

Right, back to the main topic…

How does a credit builder credit card work?

Some people with low credit scores can find it hard to get approved for high-street credit cards because they’re deemed too risky by lenders. This is because they’ve perhaps made some mistakes with money in the past which have resulted in a poor credit score. Or maybe they’ve never borrowed money at all, and so have what’s known as a “thin” credit file. This means they could be brilliant at borrowing money, but because there’s no information available to say they’ve done this before, there’s no proof of their brilliance. Credit builder credit cards are designed for these people, meaning they have a greater chance of being accepted.

A credit builder credit card works in much the same way as a normal credit card… you use it to make purchases, you’ll be charged interest on those purchases and you’ll have to make repayments on any balance you build. Because they’re designed for riskier people, they come with lower credit limits and higher interest rates to start with. But, if you stick to making your regular repayments, over time you could build your credit score and qualify for a card with a bigger limit or cheaper interest. As with all things credit scores, though, patience is a virtue.

How to apply for a credit builder credit card

Firstly, we suggest you research all the credit builder credit cards currently available on the market and select the best one for you, your needs and financial history.

When you come to apply, the lender will want to know your personal details, such as name, date of birth, address, employment status and income. They’ll use this information, plus information from your credit report, in order to make a decision on whether or not to approve you. Your credit report is held by credit reference agencies – Experian, Equifax and TransUnion - and includes financial information such as any open credit accounts you have and the amount you owe, if you’re registered on the electoral roll and if you have any missed payments, CCJs or defaults. You can check out your Equifax credit report with CredAbility to see what information they’re sharing with the credit card providers you apply to.

What credit limit will I get on a credit builder credit card?

 There’s no hard and fast rule for what credit limit you’ll be offered on a credit builder credit card as it depends on your credit score and other factors. You’ll find out for definite what credit limit you’re offered upon approval.

The credit limit you’ll normally get on a credit builder card ranges from about £200 to somewhere between £1000 and £1200. But, there are some cards that go up to as much as £2,500. If it’s your first time managing a credit card, these smaller starting limits can be a good idea while you get fully up to speed and used to how a credit card works and build confidence making repayments on a smaller balance first. Just a thought…

Tips for using a credit builder credit card

So, let’s say you’ve been approved, here are some of the best tips we can give you to build your credit score as quickly as possible.

  1. Don’t use the card to withdraw money. Why? Using your credit card to get money from an ATM means you’ll have to pay a withdrawal fee and maybe a higher rate of interest on the money you take out. Not worth it unless you’re desperate.
  1. Repay the full amount when your bill arrives if possible! Why? Doing this means you won’t have to pay any interest at all and it’ll do wonders for your credit score over time. Paying your full balance on time every month will prove to the lender that you’re a trustworthy borrower and as a result you’ll be more likely to get approved for finance in the future.
  1. If you can’t pay the full balance, try to repay more than just the minimum amount every month. Why? If you only pay the minimum amount, it could take you years to clear the total balance on the credit card and you could end up paying an unthinkable amount in interest.
  1. Don’t go over your credit limit. Why? Going over your limit means using more credit than you’ve been given. Being in this situation also means you’ll be charged a fee every month that you’re over your limit, making your borrowing more expensive. Best avoided.
  1. Don’t max out your credit card. Why? It can be tempting to spend when the money is there but maxing out your credit card is a red flag to lenders and it can lower your credit score. Ideally, you should only use 30% or less of your available limit. So if you have a £500 limit, don’t spend more than £150 before you pay it all back – less is even better.
  1. Only use for normal spending. Why? A credit card isn’t a licence to spend unnecessarily. It’s designed for you to show how you spend money – and borrow it – responsibly. Use it for things you need to buy anyway, like groceries and petrol… NOT that expensive watch you’ve had your eye on.

Consider the higher interest rates

As we mentioned earlier, credit builder credit cards are designed for those ‘risker’ applicants with no credit history or a low credit score. That’s why these types of cards normally come with a higher interest rate, with some approaching 40% (variable).

This is something you should consider before applying for a credit card, as you don’t want to get yourself into a sticky financial situation if you can help it. Also, be aware that the interest rate could change. If the credit card states ‘APR variable’, this means the lender has the power to change the interest rate if necessary. The APR that you see on the advert for a particular card is the one that 51% of that card’s customers get. The APR that you’re offered could be higher, or lower.

That said, as long as you stick to our top tips above, you can limit the amount of interest you have to pay overall. And once your credit score starts to improve, you could also think about switching to a lower rate credit card.

Been rejected for a credit builder credit card?

STOP EVERYTHING. Don’t apply for another credit card… or another type of finance for that matter. You’ll be digging yourself into a deep hole. Every time you apply for finance, it leaves a mark on your credit report and lots of these marks could lower your credit score as lenders think you’re desperate for money.

Instead, it might be worth taking a look at your credit report and fixing any errors on there first as this could help your chances of being approved later on. Then, we suggest waiting at least three months before trying again. You could also try an online credit card eligibility checker if you’re interested to see if you’ll be approved, as these don’t affect your credit score. We’ll keep our fingers crossed for you!

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