By Matt Fernell, Editor-in-Chief at Finance.co.uk. Published 8th April 2024.
It is possible to improve your credit score using a credit building credit card. Learn what they are, how they work and how they can help you with our guide.
A credit builder card is designed for people with no, little or poor credit history who need to build up their credit rating or improve their credit score.
They work the same way as any other credit card - you can use them to make purchases and will be charged interest on any outstanding balance at the end of each month.
They differ from most credit cards because they come with stricter conditions and limited benefits. For example, credit limits are usually much lower, typically between £100 and £1,000, to reduce the risk of getting into debt.
The annual percentage rate (APR) is also usually much higher than standard credit cards.
Credit builder cards usually have high interest rates. Unless you pay everything you owe on it back every month, you’ll be charged more in interest than other credit cards, so always paying off your balance is essential.
When you apply for a credit builder card, you’ll likely be given a low credit limit. This means you’ll only be able to borrow small amounts on the card, which reduces the risk for lenders if you cannot pay back what you owe.
Unlike other credit card deals, you’re unlikely to find credit builder cards offering balance transfers, 0% interest rates or cash back on purchases.
Credit builder cards can be helpful if:
You’ve never borrowed any money before, so you have no credit history
You’ve been refused credit and need to improve your credit rating
You’ve borrowed before but defaulted on payments and need to rebuild your credit history
You’ve recently moved to the UK
You’ve just turned 18, and you’re a first-time card-holder
You haven’t built your credit record, and there isn’t much for lenders to judge you on
You’ve been declared bankrupt in the past
You’ve had a county court judgement (CCJ) against your name
You’re not registered to vote (also known as not being on the electoral roll)
Sometimes, credit cards to build credit are also referred to as ‘bad credit cards’ or ‘poor credit cards’.
As a general rule, the higher your credit score, the better. However, there are three main credit reference agencies in the UK, and each scores people differently.
Here is an overview of the score you’ll need from each agency to be considered to have ‘good’ credit:
Experian - A score between 721 and 880 is considered fair, a score between 881 and 960 is considered good, and a score between 961 and 999 is considered excellent.
Equifax - A score between 439 and 530 is considered fair, a score between 531 and 670 is considered good, a score between 671 and 810 is considered very good, and a score between 811 and 1,000 is considered excellent.
TransUnion - A score between 566 and 603 is considered fair, a score between 604 and 627 is considered good, and a score between 628 and 710 is considered excellent.
Experian score out of 999, Equifax score out of 1,000 and Transunion score out of 710.
If you use a credit builder card regularly and pay back the entire balance you owe on it each month and on time, you can quickly improve your credit rating. This will help you access better deals on other financial products, such as loans, credit cards and mortgages.
The responsible use of a credit-builder card could help you improve your credit score within six months.
Consistently paying your bills on time looks good to banks and providers, even if you’ve defaulted on payments in the past.
Applying for one of these cards and responsibly using it means you’ll have more options after you’ve built up your credit rating. You could be offered cheaper borrowing, and larger credit limits may become available to you.
Top tips for improving your credit score using a credit-builder card:
Use your card regularly for spending only small amounts
Avoid withdrawing cash from your credit-builder cards
Repay your balance in full each month to avoid expensive rates of interest
If you’re unable to repay your balance in full, make sure you always repay at least the minimum repayment on time
Always stay within your credit limit
Keep your balance low - under 20% of your credit limit if you can
Typically, credit builder cards don’t have many features or add-ons like other credit cards, so when comparing them, the things to look for are:
Minimum credit limit
Maximum credit limit
Interest rate/ APR (Annual Percentage Rate)
Credit builder cards charge much higher interest rates than conventional credit cards. However, if you pay off your balance in full each month, you won’t be charged any interest, so it’s important to only use your card knowing you can repay on time and in full to avoid expensive interest rates.
Most credit builder cards will only allow you to spend small amounts, which means paying back what you owe is easier because you won’t be allowed to spend lots of money on the card.
There are several alternatives to credit building credit cards if you want to borrow money and boost your credit score. These include:
Guarantor loans
These products could allow you to borrow money if you need it. They can also help you boost your credit score if you keep up with the repayments and prove you can manage credit responsibly.
If you want to improve your credit rating without borrowing, there are several things you can do, including:
Registering to vote
Making sure your details are correct on your credit report
Making sure you’re named on any utility bills so you can benefit from making these payments
It’s worth remembering that any credit product you have will impact your credit report positively or negatively. For example, having a mobile phone on a contract can help you improve your credit score if you make the payments in full and on time.
The information provided does not constitute financial advice, it’s always important to do your own research to ensure a financial product is right for your circumstances. If you’re unsure you should contact an independent financial advisor.
