Credit Builder Credit Cards

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Credit builder credit cards are designed for people with poor credit ratings or no credit history to own and use a credit card and improve their credit. These credit cards usually feature high purchase rates and low credit limits, but are more accessible than other credit cards for those who want to build their credit rating, providing a stepping-stone to better credit and other types of credit card.

Credit Card Offer Balance Transfer purchase Intro standard purchase
rate duration fee rate duration (variable)

Capital One Classic Credit Card

Ideal card for first time applicants or to rebuild your credit score.

Representative Example: The annual purchase rate is 34.94% p.a.(variable) so if you spend £1,200 your representative APR will be 34.9% p.a. variable% variable.

-% - months -% -% - months 34.94%

 

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The Lowdown on Credit Builder Credit Cards

If you have a poor credit rating, either because of previous debt problems or simply because you haven’t had much experience of using credit in the past, you may find it hard to get approved for one of the more competitive credit card offers. Lenders are understandably reluctant to provide credit to those with bad or no credit histories if they are uncertain of the applicant’s suitability.

The good news is that providers now offer several credit builder credit cards, which are much more obtainable than other types of card and offer the chance to develop a good credit history and improve your credit score. Used correctly, credit builder credit cards are a great, cost-effective way to accessing better credit.

If you use your credit builder credit card frequently for everyday purchases that you would normally make and repay your monthly balance promptly and in full, you can demonstrate you responsibility with borrowing and repaying, and your credit rating steadily improves.

There are several important features to look out for when you select and begin using a credit builder credit card. This type of card attracts a significantly higher rate of interest, often between 30% and 40% APR. This is partly because banks consider customers who use these cards are more likely to miss payments, but the high rate is also an encouragement to repay your balance in full each month.

These cards also generally feature a low credit limit, so you are restricted in how much you can borrow. A low credit limit means your credit card expenditure is more manageable and makes it easier to keep up with monthly repayments.

Credit builder cards tend to be fairly basic, without extra features such as rewards schemes and other perks, but this shouldn’t be too much of a concern if your aim is to concentrate on improving your credit score. Used prudently, this type of card is a great way to establish or rebuild your credit, which is important when you want to apply for other types of credit cards, and also for getting approved for loans and mortgages.

Tips for Using Credit Builder Credit Cards

Pay your monthly balance in full: Because credit builder cards feature high purchase rates, it is very important that you repay your monthly balance in full. Any remaining balance left on your account after the payment due date starts attracting costly amounts of interest.

Always pay on time: It is also important that you make repayments on time, since missed payments damage your credit score and attract penalty charges. One way of making sure you don’t miss payments is by setting up a direct debit to repay the minimum payment due. Covering the minimum monthly payment keeps your account in good order, but as mentioned before, you should always aim to repay your balance in full.

Switch everyday expenses to your credit card: Using your card frequently helps rebuild your credit. A possible way to do this is to switch everyday expenses such as groceries and bill payments to your card. This doesn’t mean you should overspend – only make payments that you would normally make and can afford, budgeting to ensure you can meet monthly repayments.

Avoid cash advances: These cards generally feature very high interest rates on cash advances, often as much as 39%, and unlike purchase rates this interest is applied from the day the transaction is made. For this reason, always avoid making cash advance transactions such as ATM and bank branch withdrawals.

Common Features of Credit Builder Cards

Standard purchase rate: This is the interest rate applied to credit card purchases that remain unpaid after the due date on your monthly bill. The rate is calculated and expressed as an annual percentage rate (APR), and is significantly high on credit builder credit cards because of the perceived higher risk.

Credit limit: This is the maximum amount of credit the lender allows you to take on your credit card, and is generally set relatively low on credit builder cards. While you are permitted to spend up to the credit limit, you should aim to keep your balance, and therefore the cost of using your credit card, to a minimum.

Late payment fees: If you miss a monthly minimum payment you are charged a late payment penalty fee. Late payments also damage your credit rating.

Cash advance rate: This is the rate of interest that is applied to cash-related transactions, and tends to be very high on credit builder cards – even higher than with standard credit card offers.

Cash advance interest rate: This is a fee applied when cash advances are made, and is typically 3% of the total value of the transaction.

Examples of Using Credit Builder Credit Cards

Rebuilding a bad credit rating: There are many reasons why someone may develop a bad credit rating, from missed credit payments, problems with unpaid rent and utility bills, to defaulting on mortgages and bankruptcy. Bad credit ratings can present a barrier to you getting approved for credit cards, loans and mortgages. Credit builder credit cards, however, are more accessible and provide a way of rebuilding your credit score, demonstrating you can mange your finances, and eventually providing access to other forms of credit.

Establishing a credit history: You may also have difficulty gaining credit from lenders if you have little or no credit history – if you are a young person, on a low income or have newly arrived in the UK from another country, for example. Credit builder credit cards provide a way of establishing a credit history, and used responsibly can lead to greater access to credit.

Credit Builder Credit Card Glossary

Credit history: This is a record of a person’s history of borrowing and repaying credit, with information on any late payments, count court judgements and bankruptcy. It is used in the approval process for most credit cards.

Credit rating: Also known as credit score, this rating represents a person’s suitability for borrowing and repaying credit. When a person applies for a credit card or other type of credit, e.g. a loan or pay monthly mobile phone contract, the lender requests a credit report from a credit bureau. The bureau calculates a numerical credit rating based on the applicant’s credit history, current assets and liabilities. The credit rating, along with other criteria, determines whether or not the application is successful.

Interest-free days: This is the period between your credit card statement and when the balance starts to attract interest, typically 55 days. If you can repay the balance in full within this period you avoid paying the interest.

Minimum payment due: This is the least amount you must pay on your monthly statement to keep your credit card amount in order. You should always aim to pay more than the minimum payment due, ideally paying the balance in full.

Standard purchase rate: The rate of interest applied to purchases, calculated and expressed as an annual percentage rate (APR). This is usually significantly high on credit builder credit cards when compared to other types of credit card.