3 cards for credit newcomers
By Emma Lunn
If you are new to credit, this problem may sound familiar: You need credit to build credit, but no credit card providers or lenders will give you their business. The answer may lie in a "credit-building" credit card.
Here's what these cards can do for credit newcomers, as well as three cards that offer credit (and incentives) to those with no credit history.
are credit-building cards?
Card providers want to know they can trust you to pay your bills -- and they have no way of knowing that if you haven't proven yourself.
That's where credit-building credit cards come in. This type of credit card is targeted at people with no credit history -- those who would otherwise get turned down for mainstream credit cards and best-buy deals. Such cards allow you to pay your dues, offering you credit in exchange for a higher-than average APR and low credit limit. Used correctly, they can help boost your credit score so you can get credit with better terms in the future. The key though, is the used correctly part.
"By taking out a specialist 'credit repair' credit card, it doesn't mean you have to borrow to the limit, all you need to do is use the card every now and again and make sure you make your monthly repayments on time," says Andrew Hagger, personal finance commentator at MoneyComms, "The longer you manage to do this and prove that you are in control of your finances, the more your credit score will improve."
And those high APRs? You won't have to worry about them if you do not carry over a balance every month. That makes credit-building cards a better bet than other products aimed at those with limited credit -- such as payday loans.
"The interest rates are between 29.8% to 49.9% on these cards, which is higher than standard bank credit cards, but if you pay your statement balance off in full then there's no interest to pay so the rate is irrelevant," Hagger says. "Even if you don't pay off your full balance, these cards are far cheaper than resorting to payday finance."
What's more, credit-building cards often come with perks that enforce good credit habits -- such as rewards for paying your balance on time. Here's a selection of some of the best credit-building cards on offer.
Although this card has an initial APR of 34.9%, it comes with a great incentive to manage your card well -- the interest rate shrinks by 5% each year for three years if you make payments on time and don't exceed your credit limit.
That means your rate could be down to 19.9% APR in three years, not far out of line with a typical bank credit card.
The initial credit limit for this card ranges between £250 and £1,600, and there's no annual fee.
If you make repayments on the Aquis Vanquis card on time, you could see your credit limit rise on a regular basis. New customers will be given a maximum credit limit of £1,000, but you could get a credit limit increase after four months (and every four months after that), up to £3,000. To be eligible for an increase, in addition to paying on time, you must stay under your credit limit. The card's terms also mention that taking on too much debt elsewhere may make you ineligible for a limit increase.
The card comes with a representative APR of 29.8% and no annual fee.
One Secured Card
"Secured" credit cards, commonplace in other countries such as the US, are rare in the UK. But Capital One UK offers one. Secure credit cards require you to deposit a refundable security sum of £49 or £200 in exchange for a line of credit. The better your credit history, the less security you have to pay.
However, the card has a very low maximum credit limit (£200) and a high APR (34.9%), so it's important to stick to your credit limit and make repayments on time in order to successfully build, or rebuild, your credit history.
Once you've proven yourself, however, you'll have built up a good reputation with Capital One, which should allow you to move to one of its regular credit cards -- at which point you'll get your refundable security deposit back.
Published: 2 April 2013
- Avoiding credit-builder card pitfalls – You may have heard advice to take out a "credit-building card" if you have a low credit score. However, if you don't spend and pay responsibly, such cards can further ruin your score ...
- How to turn a 'credit detox' into long-term healthy habits – It takes a few months of good behaviour to make any noticeable improvements to your score. So, many go on a "detox" before applying for products. But you're better off turning the detox into healthy, long-term habits ...
- Rebuild your score with a credit-building card – A poor credit record can harm your chances of getting financial products in the future. Fortunately, you can rebuild your score. In addition to good payment behaviour, you can apply for a credit builder card to gradually repair your score ...