How to improve your credit score with a credit builder credit card

A credit builder credit card is specifically designed as a simple way to improve your credit score over time. It is ideal for someone whose credit score has been damaged and, as a result, struggles to get approval for finance, including mainstream credit cards.

Credit builder credit cards are also seen as entry-level credit. If you’ve never borrowed or taken out a loan, it can be difficult to get the all-clear on a loan application. Lenders have no credit history to analyse and don’t know if they can take the risk in giving you credit. In this situation, a credit builder credit card will help you to build a credit score from scratch.

• It gives you access to credit while at the same time giving you the opportunity to build up your credit score.
• To get credit with a limited or damaged credit score can be very difficult.
• Low barrier to entry and less stringent acceptance criteria means you are likely to get approved even if your credit score is very limited or poor.
• The card will in most cases come with a lower credit limit and higher interest rate (APR) to offset the risk to issuers.
• Once you get accepted, it’s important to manage your debt effectively and pay off your balance every month.
• By doing this you will automatically improve your credit score over time.
• A better credit score will increase your eligibility for higher credit limits, better rates and access to more mainstream credit cards.

The features on a credit builder credit card will be similar to that of a standard credit card but there will be minor variations within the specific features.

• Higher interest rates. The interest charge on a credit card will generally be shown as “APR“. APR stands for Annual Percentage Rate and this is what you’ll pay to the card issuer on top of the money you borrow. The APR includes the credit interest rate as well as any compulsory fees and is averaged out over 12 months. The APR on credit builder cards is higher than on standard credit cards to compensate for the deemed risk issuers are taking. Rates of 35% and above are common among lenders.
• Lower credit limit. Your credit limit is the maximum balance amount you are allowed on your credit card at any one point. This limit will be calculated by the card issuer and is dependent on various factors, mainly your credit score and your annual income. To protect credit providers and reduce the consequences in case of a default, the credit limit on a credit builder card will be much lower. It will generally start between £100 and £1,200.
• Fewer account fees. It’s very rare to see monthly or annual account fees in this space.
• Standard credit card security and protection. Cards are secured by a chip and pin system for physical payments and by a 3 digit security code for online payments.
  Protection is also provided through the Consumer Credit Act against suppliers that fail to deliver goods and services or where a product is misrepresented by marketing.
• Interest-free period. Credit cards often carry an interest-free or grace period. During this period no interest is charged on outstanding balances.
  You will benefit from grace periods if you pay your balance off in full every month as it is only applicable on new purchases and, in most cases, not available on cash advances or balance transfers.
• No-frills credit card. Typically, a credit builder credit card won’t come with any bonuses or extras. The main purpose of these cards is to build up your credit score. If you keep up with your monthly repayments and manage your credit well, your credit limit could be increased and your APR might be reduced. Some providers do offer a short 0% purchase period and basic cashback structures as an introductory offer but this is not common.

Using a credit builder credit card to improve your credit score is a serious decision. To make sure you are choosing the right option for you, there are a few aspects to consider.

• Know the fees and rates. The fee structure on a credit card will give you a good indication if you are able to afford the line of credit. This includes the APR on outstanding balances as well as the mandatory annual fees.
  There are also circumstantial fees to keep in mind that apply in certain situations, like cash withdrawal fees, late payment fees and overseas transaction fees.
• Look out for benefits. Rewards on credit builder credit cards are not common but in some instances the issuer might include basic benefits such as 0% purchase periods and cashback.
  You can save money on interest and fees by choosing a card that has benefits, as long as you stay within the credit limits and pay off the balance in full every month.
• Likelihood of getting approved. The last thing you want to do is to keep applying for credit cards when you keep getting rejected. This will damage your credit score even further and make it more difficult to get credit in the future. There’s often an eligibility calculator that you can use to give you an indication of how likely you are to get approved before applying. This will not affect your credit score and can help you compare credit cards by eliminating options that you are not eligible for.

It helps to look at both the positives and the negatives when deciding if a credit builder credit card is a good option for your current situation.

• Never miss your minimum repayments. This will result in additional fees and charges and damage your credit score even further. It’s always better to repay the full amount every month to prove to lenders you can effectively manage your debt.
• Avoid withdrawing cash. Cash withdrawals on any credit card are expensive. The rates on credit builder credit cards are likely to be even higher. If you regularly withdraw cash it might signal to card providers that you are cash strapped and they could refuse you credit going forward.
• If you are rejected, wait before applying for another card. Every time you get rejected for a credit card application, your credit score is impacted. It’s best to take a step back and find out why you were rejected before continuing.