A “bad credit” credit card can help you escape the dreaded credit Catch-22

By Emma Lunn

Those with a bad - or thin - credit history often find themselves in this frustrating situation: They need to build a healthy credit history, but nobody will extend them credit.

This is where "credit building" or "credit repair" credit cards come in.

Getting the most out of bad credit credit card
Consumers with poor or limited credit histories can find it difficult to get mainstream credit cards with the lowest interest rates, highest limits and best rewards. Yet many credit card companies have cards designed to help you rebuild your credit  and eventually graduate to mainstream cards. bad-credit

These credit cards generally have higher annual percentage rates (APRs) - often above 40%, according to consumer advocacy group Which?.  They also generally sport lower credit limits to minimize the credit card company's risk.

That means cardholders have to be disciplined, according to Which?, because high APRs make missteps like making late payments and carrying large balances extra expensive. Which? Recommends that those with bad credit credit cards set up a direct debit for the whole balance. That way, they won't run the risk of missing a payment and getting hit with interest charges. Yet they can still take advantage of the convenience of plastic, as well as the consumer protections under Section 75 of the Consumer Credit Act.

Credit-building credit cards currently available include Barclaycard's Initial Visa card with an APR of 29.9%, Capital One's Progress Mastercard at 29.9% and Vanquis Bank's Granite credit card at 34.9%.

Although the credit-building cards have high interest rates, when used properly they can improve a poor credit score, eventually making the borrower eligible for a more desirable credit card.

Using credit-building credit card properly means using it regularly, staying within the credit limit and paying off the balance (or, at the very least, the minimum) each month.

How long to stick with a bad credit credit card?
How long consumers will need to pay their dues with a credit-building card before upgrading varies from issuer to issuer - and from consumer to consumer.

Keep an eye on your credit rating by pulling your credit reports. Each of the three main credit reference agencies (Experian, Equifax and Callcredit) compiles information on consumers using the electoral roll, county court judgements and reports from financial institutions. In addition to compiling the report that shows your credit history, the agencies also generate a credit rating, a score that gives a snapshot of your credit health.

You can get your report and your rating from each of the agencies. Because lenders differ in which agency they use, it's best to check all three. Under the Data Protection Act, each agency is required to furnish your credit report each time you ask for £2. Yet the report will not contain your rating. To get that, you need to contact each agency and pay a fee. Equifax, for example, charges £14.95.

If you notice a sustained increase in your rating, consider applying for a better card. Yet be sure to space out your applications. Each time you apply, an issuer will pull your credit report, and these checks will be noted in your history. Frequent applications for credit make you look credit hungry and risky in the eyes of lenders.

With some credit-building cards, upgrades to better interest rates and terms are automatically rewarded after good behaviour, negating the need to apply for an entirely new card.

With the Capital One Progress card, for example, it takes about three years to qualify for a mainstream rate of 17.9%, according to the company's website. The APR is reduced by 2% every six months, provided the cardholder doesn't miss any monthly payments or exceed the credit limit.

The Progress card is aimed at those who have made some credit mistakes in the past - and is designed to give them the chance to earn "a more competitive interest rate that they could struggle to obtain elsewhere," says Capital One Managing Director Brian Cole.

Why building a credit history is important

Building a good credit history is important if you want to apply for any form of credit, from a mortgage to a car loan. Without a good credit history, borrowers will likely be charged higher rates to borrow money or be turned down flat by lenders.

A poor credit history could be due to county court judgments against your name, missed payments on phone or utilities bills or irresponsible use of credit cards in the past. Other people will have what's known as a "thin" credit file because they've never borrowed money or had a credit agreement. They are often treated the same way as people with a poor credit track record, as lenders like to know how borrowers have handled credit in the past before lending to them.

See related: What banks consider to be bad credit, Being too credit-shy can backfire

Published: 3 April 2012