You may think of a credit card as something people have in reserve for spending sprees or emergencies, but they can also be very handy if you need to rebuild your credit rating. If you have damaged your credit rating in the past or have simply never had credit before, getting a low-limit credit card is a great way to restore your rating and get access to better deals in the future.
Known as credit building cards, this type of card has been designed to help people with poor credit ratings, rather than being a means to spread the cost of a large purchase or to transfer balances around. If you have been finding it hard to get good deals on credit because of a poor credit rating, these cards are the perfect solution to get you back onto a better footing.
How credit building cards work
- Credit-building cards are offered to people with poor or no credit rating
- They usually have low available balances, often in the region of £200 – £400
- The idea is that you use the card to purchase items throughout the month, and then when your statement comes in you pay off the balance in full
- By consistently repaying in full all the money you have spent on the card, you are demonstrating to lenders that you are responsible and conscientious with your finances
- After 12 months or thereabouts of using your credit-building credit card and paying the balance in full, you will have demonstrated your ability to borrow sensibly and are more likely to be accepted for other forms of credit in the future
Using a credit-building credit card to showcase your responsible attitude to borrowing is a much better way to build up your rating than applying for other forms of credit. Every time you apply for credit, the credit check leaves a footprint on your record, which can add to the poor rating you already have and subsequently leave you with a worse-looking record on-going.
Which credit card to use
There are many lenders offering these types of cards to people who wish to improve their credit rating, and you will need to compare which credit card is best for you before making a decision about which one to take. Points to consider include:
- The interest rate, displayed as a percentage APR: These types of cards typically attract high interest, sometimes as much as 30 per cent APR or above and the APR may vary over time. While you are paying off the balance in full, this shouldn’t matter too much, but be aware of what the APR is because if you are unable to pay, you could be in trouble.
- The credit limit: You may be offered as little as £300, or as much as £1,000. Whatever you are offered, be sure you can pay it all off in full when the statement comes in. Make sure you can exercise self-control to keep your finances in check, otherwise you could end up in a difficult to manage situation.
- Their criteria: Some lenders will be looking to lend cards to people with no borrowing history, whereas others may be more willing to lend to people with prior county court judgements, missed payments and other financial issues. Check the criteria before applying to make sure you will be accepted.