Credit Card Guides

How credit builder cards work

Credit builder cards explained:

There are many people who due to credit history or other factors fail to qualify for the credit card of their choice, but fortunately there are many ways to improve your credit score to widen the range of offers open to you in the future. One such method is by using a credit builder card. These function very similar to other cards in all respects, but have lower application requirements as well as higher restrictions and fees for use (for example, an interest rate 30% APR is not uncommon with these cards, and they will usually have lower credit limits than other cards).

Once accepted for a credit builder card, you will have the opportunity to use it to steadily increase your credit profile and open up the possibility for other types of card.

You should also bear in mind that it is not only dependent on your credit score, there are also other factors that could negatively affect your chances:

  • Bankruptcy or County Court Judgements against your name
  • Too many recent credit applications
  • Too much available credit
  • Too little credit history
  • A recent change of job or house
  • Being self-employed or having low income
  • Not being registered to vote

So by using a credit builder card and addressing some of the issues mentioned above, you should have all bases covered for improving your credit profile.

Credit builder cards – the ins and outs

These cards have lower application requirements, lower spending limits and higher interest rates than with other cards. But its important to remember that if you stick to the repayment schedule the interest will not accrue on any amounts owed, so you are essentially borrowing money for free if you pay it back within about a month to 6 weeks.

There are also other types of card that function very similarly to credit builder cards. Prepaid cards (where you top up the balance for use later) have fees involved, but yu can come to arrangement with the provider to loan you the amount of the fees for12 months up front, and then pay the fees back over the course of a year. This means you have essentially borrowed money and started paying it back over the course of a year, so this is a handy trick to improve your credit profile as this information will be sent back to the credit agencies which will then be viewed when you make an application for a credit card. This loan-of-sorts is also interest-free.

So there are a couple of options for building your credit, but it’s important to bear in mind that there is a right and a wrong way to go about applying for any card. Don’t make too many applications at the one time, since this effects your credit score negatively. Also, don’t presume you will be successful for any application and plan around that, since there is always a chance that something won’t go as planned.

A good idea is to draw up a plan for your spending over the next 12 months, and where you want your credit profile to improve in that time. Then make a list of appropriate cards and maybe get a copy of your credit report and use some of the online eligibility tools to see what cards you would have a good chance of getting. With all this in mind, you should be in a good situation to decide if credit builder cards should be part of your financial plan.