Guide to cards for rebuilding your credit score
Poor credit ratings are not limited to individuals with a bad credit history. People who have never had credit before also tend to have a poor credit rating (for example young adults who have never borrowed or residents who are new to the UK).
So, what is a credit score or rating, and do you need a good one? There are three main credit reference agencies (abbreviated to CRAs) in the UK: Experian, Equifax and CallCredit. CRAs work with financial institutions such as banks, building societies and with major retailers, phone companies, public record offices and utility suppliers, to compile data about the financial behaviour of every individual in the UK. This data includes completed payments, missed payments, rejected applications, borrowing amounts and so on, to create a credit score or rating (different CRAs provide their credit scores in different formats).
This information is then used by lenders (different lenders use different CRAs or combination of CRAs) to determine whether credit applicants are suitable candidates for borrowing. Someone with a low credit score will often find that they are turned down for a mortgage, loan, credit card or even a mobile phone contract, whereas someone with a high credit score will probably have access to the best deals available.
You can check your own credit score or rating at any time, by applying to one of the CRAs directly, or through a credit reporting company (who gather the information from the CRAs). There is almost always a fee for this service, but most offer a free trial for around 14 days, which you can cancel before this period has expired.
Those who discover that they do have a poor credit score, can find themselves stuck in a vicious circle, as the only way to rebuild their credit score is by demonstrating to potential lenders that they are now responsible borrowers, but to become a responsible borrower, you must first be allowed to borrow.
This is where credit building credit cards can help. With a wide range of cards offering varying interest rates, credit building facilities, and even rewards, there are plenty of opportunities out there with which to improve your credit score and build ‘better’ credit for the future.
How credit building cards work
Credit building cards generally have lower eligibility criteria than other products, meaning that they are accessible to a higher number of applicants. In general terms you need to be a UK resident and over the age of 18. Some card issuers have additional criteria, such as minimum income requirements (though this is often relatively low), you must not have had any CCJs or been made bankrupt in the past year.
It is always advisable to check the general criteria on any credit card, as failed credit applications appear in your credit file and will negatively affect your rating - you could end up in a worse position than when you started, and still not have a credit card!
Many credit building card providers offer an eligibility checking service, which tells you whether you are likely to be accepted for a card, and importantly this type of application does not appear on your credit rating.
By using such a card sensibly (spending within your credit limit, and paying at least the minimum repayment amount on time), cardholders are given the opportunity to demonstrate to lenders that they are reliable borrowers. Credit card providers will in turn report back to the CRAs, and your credit score will improve over time.
To make the most of your card, it is important that you use it effectively. For example, instead of using cash or a debit card to pay your usual monthly expenses, use the credit card instead, and pay back the funds immediately. This way, you are showing your credit card issuer (and in turn the CRA and future potential lenders) that you can regularly spend and repay responsibly.
It is extremely important to note that if you do exceed your credit limit or fail to pay your minimum payments on time, it will negatively impact your credit rating, meaning you could end up worse off than if you hadn't applied on two counts. You will incur fee and charges for breaking your credit agreement and your credit rating, together with your opportunity to access better credit terms in the future, will decline.
What to watch for
Because credit building cards are used as a stepping stone for proving creditworthiness, they can be quite restrictive to begin with, and costly if not used sensibly. It is not all bad news though, as some lenders do offer interest-free periods on purchases and/or balance transfers, while others offer free access to your credit report for the entire time you hold the card.
Comparing credit building cards
Multiple applications, either because you have decided another product better meets your needs, or because you have misunderstood the eligibility criteria and been rejected, appear in your credit file. Potential lenders will see these and assume the worst; these, therefore, harm your credit rating and make it less likely you’ll complete a successful application. To help avoid this issue is it essential that you thoroughly compare products before you apply, especially regarding three most important elements.
Perhaps the most important item you should check before applying is the eligibility criteria. These vary slightly from card issuer to issuer and even product to product. If you don't meet the eligibility criteria of a product, do not apply. You will not get the product, and it will harm your credit score.
As lenders are unsure if card holders will repay their debts (because they either have only a poor credit history to judge you on or no credit history whatsoever), they only tend to offer relatively low credit limits when you first take out their card. Most credit-builder credit cards will have limits of between £100 and £500, but this is likely to increase over time after demonstrating your responsible financial behaviour. Of course, a high credit limit can be useful, but it can also be an opportunity to borrow beyond your means.
Credit cards for those with bad or no credit history tend to have a higher APR (annual percentage rate) than more conventional credit cards. Typically interest rates for such cards start around the 29% mark, but some are as high as 59% or even higher. It is important that this interest rate is taken into account when choosing a card, as you will have to pay this rate on any balance you are unable to pay within the billing month. It is also worth remembering that the advertised interest rate may not be the rate you are offered - it could be much higher.
If you think you're ready to compare cards, check out our credit building card comparison table for the best deals available from our partners.
Credit building credit card alternatives
If you have been declined for a credit building card, but you still need to build your credit rating, there are alternatives.
Credit building prepaid cards, which do not offer credit facilities, require you to pre-load the card with funds before you spend.
The advantage these cards offer is that there is no credit check, and therefore so long as you are a UK resident and over the legal age of 18, you are likely to be accepted. However, these cards do charge a monthly fee, as many other prepaid cards do. The fee clearly makes these products less attractive than credit cards, but it is necessary to enable the credit building functionality, as it treated as a loan repayment which the prepaid card issuer reports back to the CRA that you are responsibly paying. Of course, if you do not have sufficient funds deposited in your account you will miss your monthly payment, and this will be reported to CRAs, harming your credit rating and defeating the object of having (and paying for) a prepaid card in the first place.
The simple way of avoiding this problem (if you have enough money) is to apply for a credit building prepaid card and deposit funds which are sufficient to cover the monthly fee for the period of time you intend to have the card. You can then leave the prepaid card issuer to draw down this money on a monthly basis to pay the fees, rebuilding your credit while you never actually use the card for any spending.