Understanding Credit Builder Cards in Detail

When it comes to getting credit or a loan, the process can be intimidating. To acquire credit, one requires a good credit rating. However, it’s challenging to get credit without a good credit rating. And the circle goes on.

Luckily, there are credit builder cards to help one break free from this vicious cycle. These are unique credit cards designed for people with bad or no credit history. Such cards make the process of credit card application for bad credit easy.

Since credit scores play a significant role in determining one’s creditworthiness, people with low credit scores don’t qualify for standard credits and cards. But with credit builder cards, one can improve their credit score or build one from scratch to enhance their chances of qualifying for competitive credits.

Having said that, credit builder cards have high interest rates and low credit limit. So, one must be mindful when using them. Managing the credit builder cards responsibly is the key to seeing a positive result on your credit score.

How does a credit builder card work? 

A credit builder card works just like any other typical credit card. You get a monthly spent limit and a date to repay the amount. Just like a standard credit card, credit builder cards also charge interest rates and late payment fees.

Besides this, under Section 75 of the Consumer Credit Act, purchases made on the card worth up to £30,000 may be eligible for protection.

One of the significant differences between a credit builder card and a standard credit card is that it has a comparatively lower credit limit and higher interest rate. Moreover, your credit limit will depend upon your financial situation and credit history.

How to use a credit builder card?

If you consider using a credit builder card to improve your credit score, you must be careful about how you use it. As mentioned above, credit builder cards have a higher interest rate and late repayment penalty; thus, failing to make timely repayment will only degrade your credit score.

Here are some practical tips for using a credit builder card:

The key to using credit builder cards is to use them sensibly. Here’s how:

Tip 1: Don’t overspend on your credit limit. If you borrow from a credit agency, ensure you don’t exceed your credit limit.

Tip 2: Maintain a low credit balance. Credit rating companies evaluate your credit score by looking at your credit utilisation ratio or CUR. If you use less of your credit limit, the company will interpret it as a sign of your financial stability and give you a good rating.

Tip 3: Pay your dues on time. If you regularly miss your repayment date, your credit score will go further down. Thus, make sure to repay the credit on time without falling behind the due date.

Tip 4: Always pay your credit balance in full. Since credit builder cards have a high interest rate, the debt will only add up if you repay the minimum limit. You can avoid paying interest or late payment penalties if you repay your credit bill in full, every month.

Tip 5: Don’t withdraw cash. Credit builder cards also charge high interest rates on cash withdrawals. Besides this, the interest is charged from the time you make the withdrawal. So, avoid making cash withdrawals on your card.

Who Should Get a Credit Builder Card?

Most people with a bad or no credit score find it hard to get a standard credit card. Such individuals can consider opting for a credit builder card. Credit builder cards are most suitable for people if:

  • They have no credit history.
  • They struggle to make payments or are in debt.

Although credit builder cards are a perfect solution to rebuilding credit scores, one should weigh in the advantages and disadvantages offered by such cards to make an informed decision. 

How to apply for a credit builder card?

Credit card application for bad credit process is similar to any other standard credit card.

There are several credit builder cards available to people in the UK. Before picking one, go through each credit card provider to understand their features, credit limits, terms, and eligibility criteria.

Remember that when you apply for the card, the provider will conduct a hard credit check, which will reflect on your credit history. So, only apply if you are confident your application will get approved.

Leave a Reply