Some credit cards are aimed at people who are either looking for their first credit card or those that have a chequered history when it comes to borrowing money and need to rebuild their credit rating (also known as a credit score).
Credit building cards tend not to offer any benefits or rewards as they are there to serve a purpose – to offer customers with greater risk a way to borrow. However, they do come with high interest rates so it’s vital you pay off your balance in full every month.
When you apply for a credit card, companies will credit check you to find out what your financial history is like and how reliable you are at paying back debt. They want to get an idea of whether you’ll be able to pay back the amount you’re borrowing on time and are far more likely to lend to you if you have regularly kept up with your debt repayments in the past. If you therefore don’t have a good credit record, the lender is less likely to want to give you credit.
You may think that if you have never had credit in the past you’ll easily be able to get your hands on some in the future. But if you don’t have a credit history, there’s nothing to prove whether or not you’re good at managing your debt so again, lenders may be reluctant to lend to you.
Even if you do get offered credit, it’s highly unlikely you will qualify for one of the best credit cards on the market. This is where credit building cards come in. They are generally easier to get hold of and don’t require you to have an immaculate credit history. With these cards, you often get a starting credit limit of between £150 and £1,000. Depending on the provider, your credit limit will be increased after set periods, for example four months, based on your usage and payment behaviour, allowing you to have up to £3,000 on most cards.
High interest rates
The major drawback to these cards is they typically come with high interest rates. The advertised rate is often as high as 36% but this isn’t necessarily the rate you will receive – if your lender isn’t prepared to give you credit at that rate, it may increase it – in which case the rate could be as high as 60%.
The way to nullify this hefty monthly interest is to pay off what you borrow every month by setting up a direct debit. You therefore need to ensure you don’t spend more than you can afford to pay back each month. By religiously paying off your balance each month, your credit rating will improve and more lenders will ultimately be willing to lend to you. You will also then be able to get access to better deals.
However, you should be aware that although these cards are designed for those of you with a poor credit history, your application could still be refused. Some providers rule out people who have had previous County Court Judgments (CCJs) or who have been made bankrupt. If you have never had any credit before in the UK, you could also be locked out.
Improve your credit rating
There are a number of other things you can do to improve your credit rating. For a start, you should get on the electoral roll if you’re not already on it. You should also avoid applying for too many credit cards in one sitting. Every time you make an application and a credit search is carried out, a footprint is left on your credit score. If lenders see too many footprints in a short space of time they may think you’re overstretching yourself financially and will be less willing to lend to you.
You can check your credit rating through credit reference agencies such as Equifax, Experian or CallCredit. These all allow you to get a statutory report for £2, while Equifax and Experian also let you sign up for a 30 day free trial – just remember to cancel it after that time. If there are any mistakes on your credit report, you should ask your lender to correct them.
1. Get on the electoral roll
2. Don’t apply for lots of cards, it looks desperate
3. Open a current account with an overdraft
4. Check your credit rating and get any mistakes corrected
5. Stay at the same address and job for a few years – it proves stability
6. Close unwanted accounts