Created by: Rebecca Goodman | 17 June 2019

How do credit builder cards work?

Credit builder cards are a good way for those with poor credit scores to boost their credit history. It’s easier to get one of these cards if your credit score is less than perfect and if you follow the rules and repay the debt each month, they can be a real help in rebuilding your credit score. Here we list the five things you need to know before applying for one.

1. A poor credit score can be improved

There are lots of reasons people may have a poor credit score, and it’s important to know this isn’t permanent and there’s lots of things you can do to improve it.

You could have a poor score because you’ve missed payments in the past or been repeatedly late paying back a debt, you have been declared bankrupt in the past, you’ve had a County Court Judgement (CCJ) made against you or if you have outstanding bills to pay.

However, it could also be that you’ve never had credit before and therefore no credit history, or you’re not on the electoral register. All of these can contribute to a low credit score. 

2. Lenders aren’t keen to give cards to those with bad credit scores

If you have a low credit score, lenders will see you as a risky borrower and they will think you are less likely to pay back a debt. This means they may reject you completely when you apply for a loan, or the interest rate you’re given could be higher than it would be for someone with a better score.

3. Credit builder cards can improve your credit history

In order to improve your score, you need to make sure you’re keeping up with monthly payments and you’re not falling behind or missing any. Doing this over time will help to boost your score, and bring it back to a decent level.

As credit builder cards are available to those with lower scores, having one and using it properly can help you to increase your score. This will make you more likely to be approved for credit in the future.

4. The interest rate will be higher with a credit builder card

If you’re taking out on of these cards make sure you’re aware of the interest rate. It’s likely to be more expensive than a mainstream card and therefore it you do run up a debt on it, this will cost you.  Therefore the best way to use one is clearing it each month, and paying off any debts as soon as you can.

As these cards also have a lower spending limit, you should not be able to rack up too much debt and they should help you to manage the money you owe.  

5. Prepaid cards are another option if you’re struggling with debts

Taking out a new credit card isn’t the only option, and for many this won’t be suitable. A prepaid card is another option, you can load these with cash and use them when you need to.

Some prepaid cards give you the option of helping to rebuild your credit score by effectively loaning you money on top of the amount you load the card with, which you’ll then need to pay back over a set time limit.

If you’re really struggling, there are a number of free and independent charities you can talk to including StepChange and National Debtline.

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