During my time at University, I managed to build myself quite a good credit rating without the use of credit building cards (also known in some circles as ‘cards for bad credit’).
At Fresher’s Fair I signed up for a Barclaycard student credit card. Of course, you could argue that this is a credit building card if it is used correctly. However, it isn’t labelled as such because it is aimed at students who need to borrow money to subsidise their living costs (it is likely, in my humble opinion, that most students don’t use it for improving their credit score or for subsidising living costs but more for improving their alcohol tolerance).
It worked well for me in both respects because I was so worried about money that I managed to keep my spending under control (most of the time) but I also had an emergency fund to fall back on.
What I didn’t realise at the time was that each month I kept to my credit agreement by not going over my small credit limit and making the minimum repayments on time, I also received a healthy green light on my credit report. Paying off my monthly contract phone bill also helped.
However, I have friends that weren’t so fortunate and they have had to use credit building cards to either start their credit history, because they didn’t have any credit accounts at uni, or to rebuild their credit score because they abused their accounts so much that their reports took a bashing.
If I were in their shoes, credit strengthening cards would look decidedly unattractive when compared to other cards because they have higher APRs, lower credit limits, no rewards and no 0% balance transfer or purchase offers.
In reality, all of these features are completely irrelevant if you want to build your credit rating because in this financial climate, you just won’t get access to low APRs, interest free deals and huge credit limits if your credit history doesn’t prove to the credit card company that you can manage credit sensibly.
The best thing you can do is bite the bullet, get the credit building card, use it as much as you can and pay it off in full to avoid paying interest at the high rates because, at the end of the day, you need a decent credit rating to get access to the financial services (mortgages, car loans etc.) you are likely to need in your lifetime.
If I were in a situation where I did need to use the services of a credit building card (and bear in mind that I am quite disciplined when it comes to managing my money) I would start by paying for my weekly shopping and fuel with my credit card and then put by the cash from my current account into an instant access savings account until my credit card bill arrived. I would then use this saved money to pay my credit card bill in full.
The beauty of this approach is that you have to pay for shopping and fuel each week anyway so you might as well build your credit rating in the process. You will also earn a little bit of interest on the money you put by which would earn next to nothing in a current account (indeed nothing if you are still in your interest free overdraft because you don’t earn interest in current accounts with negative balances).
One word of caution though – you need to be disciplined with your money to use credit strengthening cards effectively. It also helps if you have access to internet banking so you can transfer money from your current account to your savings account after each shop – you don’t want to be able to make the excuse ‘I couldn’t get to the bank to transfer the money and spent it by accident’ and then end up making your credit score worse).
