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What are credit-building credit cards?

Credit-builder credit cards are credit cards for people with no or bad credit, who want to improve their credit score. Your credit score is how lenders work out if you’re a reliable person to lend money or give credit to.

If your credit score is bad, you’ll find it more difficult to borrow money or get credit. But the problem need not be a permanent one, and one way to make it better is to get a credit-builder credit card.

The most popular credit card for young people

According to MoneySuperMarket data correct as of June 2019

Who is a credit-builder credit card for?

Credit cards to build credit can be a good choice for people looking to improve their credit score, or for people who don’t qualify for mainstream deals. If your credit score isn’t great, there are a few different reasons why this might be:

  • 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

Getting a credit-builder credit card can help improve your credit score. Other things you can do to improve your score include paying bills on time, making at least the minimum repayment every month on existing credit agreements, and registering for the electoral roll at your current address.

How does a credit-builder card work?

Credit-building credit cards – also known as ‘bad credit’ credit cards – have higher-than-average annual percentage rates (APR) and low credit limits. This means you won’t be able to borrow a large sum of money, while the interest rate will be higher than normal on the money you do borrow.

However, you can avoid paying any interest by repaying the balance in full each month. Doing this over a sustained period of time will build your credit – and make you more attractive to lenders in the future. Repaying your debt each month will show that you can handle credit and that you have your finances under control.

The most popular credit card according to income

According to MoneySuperMarket data correct as of June 2019

What are the downsides of a credit card for bad credit?

The main downside to a credit-builder credit card is the high APR. If you end up paying interest on your debt, it will be very expensive.

These cards usually have a relatively low credit limit, so you won’t be able to borrow much money. But this can be a good thing as it will stop you accruing large debts you can’t afford to pay back.

Credit-building alternatives

Credit cards aren’t the only option for people who want to restore their credit score. Some prepaid cards, which require you to load cash onto them before you spend, also offer a bolt-on credit-builder facility. This is where the card provider effectively ‘lends’ you a year’s worth of monthly card fees up front.

The loan itself is interest-free, but you will be expected to pay it back over the course of 12 months.

Details of how reliable you are with your payments will be passed to credit reference agencies and, if the report is positive, your credit score could go up.

What is the best credit-builder card?

Here’s what you should consider when you’re choosing a credit-builder card:

  • Don’t apply for more than one at once: If you’re unsure of your credit rating then it’s not a good idea to apply for too much credit in a short space of time. Applying for a credit card creates what is called a ‘hard check’ on your credit file, and multiple hard checks can harm your score
  • Check your eligibility: A good way to avoid hard checks is to use an eligibility checker that lets you see a range of different credit cards – and the likelihood of being accepted. This way you can consider all your options before you actually make an application
  • Interest rates: The interest rates offered on credit-builder credit cards are never going to be competitive, but providers offer different rates, so it’s worth checking what’s available
  • Benefits: Each card might offer different rewards and benefits, whether it’s in-app banking, access to track your credit score or 24-hour customer service. Choose the card that prioritises what you want from a credit-builder credit card

The most popular credit card according to where you live

According to MoneySuperMarket data correct as of June 2019

Comparing credit builder cards

MoneySuperMarket’s Eligibility Checker lets you compare different credit-builder cards, and shows the likelihood you will be accepted for each one. It asks for a few details such as your name, address, income and financial situation, and then shows you a list of credit builder credit cards.

Different cards will come with different interest rates and some will even have added benefits, such as the ability to earn rewards. You’ll be able to easily browse and weigh up which one suits you best. Once you’ve settled on a card that suits you, simply click through and apply.

The most important thing to remember with this type of card is that you must use it to your advantage. Defaulting on payments will result in you paying hefty rates of interest and getting caught in a debt cycle – this will damage your credit score even more and force you to pay more for credit in the future.

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