Compare Adverse & Credit Building Credit Cards

Credit builder credit cards

Credit cards can bring a number of benefits. They provide an easy way to pay for goods and services, whether in person, online or by phone and can be a convenient alternative or supplement to carrying cash. If you have a poor credit rating you may find it difficult to successfully apply for premium or mainstream credit cards and other forms of credit such as personal loans. Credit builder credit cards are designed specially for people with poor or non-existent credit histories.

What are credit builder credit cards?

Credit building cards are simply credit cards designed for people who have trouble qualifying for other credit cards due to poor credit ratings. They usually have high interest rates and low credit limits – the maximum you are allowed to spend – that reflect the increased risk of a customer with a poor credit rating.

What are the benefits?

A credit building card allows a customer to access credit where they might otherwise not be able to. Unlike a debit card, which draws on existing funds in a bank account, a credit card basically allows you to borrow money every time you use it. Most credit cards, including credit builders, have interest-free periods. If you pay the balance back in full before the end of this period, you will not usually have to pay any interest on the account. The due date will be on your regular monthly statement.

If you use a credit building card sensibly and make at least your minimum payment each month, you may also start to repair a damaged credit rating or build up a credit history if you have not previously had one. It can be a slow process but eventually you should be able to qualify for credit cards with better rates of interest as well as other forms of credit.

How do credit building cards work?

Credit building credit cards work in the same way as ordinary credit cards. You can make purchases either in person using your PIN (or, though less common these days, by presenting your signature), online or over the phone. You can usually also make cash withdrawals at an ATM, although some credit builders may have limits on this and the interest rates for these cash advances can be extremely high.

As long as you use them sensibly and make your repayments in time, they can also help you repair a damaged credit rating or build one up from scratch. People who have never had a credit card or been in debt often express surprise that they are not considered a good or low-risk prospect by credit providers. The reality is that if you have never borrowed before, lenders simply do not know how responsible of a borrower you will be now or in the future.

In order to understand how a credit building card works, you should also understand how the credit rating system works. Credit reference agencies collect information taken from credit providers, financial institutions and documents of public records such as County Court Judgements (CCJs). They use this data to produce reports that they then sell to credit providers. These lenders use the credit reports, alongside other information such as that provided on application forms, to decide whether to offer credit to an applicant and on what terms.

One of the most important aspects of your credit report is your recent credit history. Details such as the date on which credit accounts were opened, the credit limit and details of any missed payments are usually held for six years after an account is closed. If you have regularly missed payments or defaulted on a loan in the past, this can have a hugely negative effect on your current credit rating.

Conversely, holding a credit building credit card and making all your payments in time will show up on your credit report and have a beneficial effect.

It's worth noting that every application you make for credit also shows up on your credit report. It does not show whether the application is successful but making multiple applications for credit is generally seen as a bad sign by lenders. If you find you are being turned down for mainstream credit cards, continuing to apply for them could in itself harm your credit rating.

What are the drawbacks?

As credit building cards are designed for people with poor credit ratings who may be considered comparatively high risk, they usually have far higher interest rates than other credit cards. When you compare credit builder cards it generally makes sense to go for the one with the lowest interest rate but other issues such as available credit limit could also affect your decision. Credit builder cards also usually have lower credit limits than more mainstream cards.

If you pay off your balance in full each month the interest rate shouldn't really be too much of a issue. If you do have an outstanding balance however, you will be charged interest on whatever you owe and this will cost more than it would on a card with a lower interest rate. Even if you fully intend to pay your balance, unexpected expenses could crop up or there may be some other reason why you are unable to pay the balance in full in any particular month.

If you cannot pay off the balance you should at least pay the minimum amount due. Failure to do so could lead to penalties and is also likely to have a negative affect on an already poor credit rating.