‘Credit-building’ credit cards: are they a bad idea?

If your credit file’s looking a bit worse for wear, you may be tempted to apply for a ‘credit building’ credit card. You might’ve seen an advert urging you to get one, as it’ll work a charm on that beaten up credit score of yours. Sound familiar?

Look, we get it. Once you’ve paid off your debt – or nearing the finish line – it’s normal that you’d want to restore your credit file to its former glory.

Sadly, it’s these good intentions that the providers of these cards are banking on (pardon the pun). Before you sign up, make sure you know all the facts…

What are credit cards for bad credit?

Credit cards for bad credit are sometimes called ‘credit-builders’. They tend to have lower spending limits and higher interest rates than other credit cards.

You might assume that the fact a firm is willing to offer you a credit card means that the risk is manageable for you. Applying for credit can be nerve-wracking, so it can be comforting to think at least these guys might say yes to your application.

But here’s the rub; credit cards that are targeted at people with poor credit ratings often have very high interest rates, sometimes as high as 70% APR.

Providers of credit-building credit cards know this isn’t a great deal in the long-term. That’s why these cards are packaged as medicinal wonders for a mortally wounded credit file.

As tempting as it may be, it’s strongly recommended that you think carefully before going down this road. In fact, many people who’ve had one of these cards feel it actually made their financial situation worse.

checking credit report

But I need one of these cards to help make ends meet!

If you’re struggling to cover living costs, and you’re wondering if one of these cards could help you stay on track, please be cautious.

If day-to-day expenses are becoming difficult to manage, this is often a telltale sign of a deeper problem, such as unmanageable debt or living beyond your means. Getting free debt advice would be a better option.

Shut up, MoneyAware. I need to improve my credit score and that’s the end of it!

Okay, okay, we hear you. You’re determined to improve your credit score, and we’re right there cheering you on. But trust us on this one; there are better ways to do it than saddling yourself with a truckload of interest.

For instance, you could:

  1. Pay back any credit you’ve borrowed. No, really. Every time you make a payment on debts you already owe, this gets logged on your credit file. Creditors will see that you’re making an effort to pay off your debt, which’ll go in your favour for future credit applications.
  2. Get on the electoral roll. Creditors can compare the information about you on the electoral roll to your application to make sure it’s accurate. The added security can really boost your chances when applying for credit.
  3. Check your credit report to make sure it’s correct. Mistakes happen. it’s possible that there’s an incorrect note or an old debt that needs updating on your file. It costs nothing to check your credit file and it only takes a few minutes. Remember, there are three credit reference agencies – Credit Karma, Equifax and Experian – so make sure you pay each of them a visit.
  4. Check you’re not linked to someone with a poor credit score. You can ask the credit reference agencies to ‘disassociate’ you from this person so that their actions no longer affect you. If you have joint debts with that person that still need paying off, you won’t be able to break this connection until the debt is settled.
man on phone outside D.I.Y. shop

I keep applying for credit but I’m getting nowhere! What can I do?

One of the most damaging actions a person can take when applying for credit is to apply for several products in quick succession. This behaviour sends up great big Elmo-red flags to lenders that for whatever reason, you’re desperate for credit, and may struggle to pay it back.

This super not-fun financial dance is what’s known as the ‘rejection spiral’, and you don’t win any pretty trophies for participating.

If you want to apply for a credit card, carry out a ‘soft search’ first. Several websites have an eligibility calculator that can tell you your credit rating, and how likely it is that your application will go through without any quibbling.

Ugh, I already have one of these cards…

First off, don’t feel bad. You know there’s no judgment here. Let’s be honest, those adverts and sales teams you may have seen promoting these cards in the shopping centre make them sound fabulous!

Here are some quick tips to make sure the card actually boosts your credit rating, rather than bruise it:

  • Always try and pay the balance off in full each month. By doing this, you shouldn’t get charged that truckload of interest we talked about earlier: you don’t need to pay interest to improve your credit rating
  • When you take out the card, say ‘nah’ to automatic credit limit increases. That way you can keep control over the credit limit
  • Stick to your credit card limit. If you exceed your limit, further charges and interest start creeping up. This could make it harder to get further credit in future
  • Make sure you pay on time each month. Obviously, this does wonders for your credit rating. It also helps you keep any promotional offer that you’ve received with the card
  • Always try to make more than the minimum payment each month. If you can’t afford to pay more than the minimum, let the lender know as they may be able to help you out
  • NEVER withdraw cash on a credit card. Your lender might see this as a sign that you’re struggling financially. This could make them reluctant to increase your limit or reduce your interest rate down the line
  • Check your credit report using a soft search every few months, to see if your card use is improving your rating

Have you taken out a subprime credit card? Are you struggling with high interest or paying it off? Let us know in the comments.

Posted by in Living with debt