What are credit building credit cards?

The credit crunch has made it incredibly difficult for people without perfect credit reports to obtain the best credit card deals available. However, there are now plenty of alternative sources of credit on the market, one of the best being credit building credit cards (aka credit cards for people with bad credit).

These cards will have higher interest rates and lower credit limits than standard cards but don’t let this concern you too much when you are using them to build your credit rating because they will serve you well if you use them right.

The idea behind them is that consumers can use them to pay for stuff they would usually buy anyway (which is why the low credit limit isn’t a problem because it’s not the money you are after) and pay off the balance to prove to lenders that they can manage their credit responsibly.

Due to the high interest rates, consumers should not use these cards to spend, spend, spend, and then get into high monthly repayments. Instead, spend a reasonable amount, put the money you would have normally used aside, and then use the money you saved to pay the balance in full every month.

Over time, using credit builder credit cards will show lenders that you can handle money and a credit card, and you may then become eligible for the best credit card deals, including 0% credit card offers. This improved access to the credit card market will mean that you can pick and choose the top deals to make the best use of what credit cards can offer you.

What to spend it on…

What you choose to spend your money on is up to you. For example, you might decide to do your weekly shop on the card, fill up your car with a full tank of fuel, or even pay the gas and electricity bills. However, the most important thing to remember is that this type of credit card is not designed to give you extra money.

Using credit builder credit cards

Consumers looking to improve their credit rating should only be spending money they have in their bank account, not money they do not have. What we mean by this is that you buy whatever things you were going to buy with the money in your bank, but you use the card instead, you then use the cash you have to pay off the card.

It is also a good idea not to use the whole amount on the card – try to stick at around 60% usage. So, if you have a £1,000 credit limit, try spending around £500 to £600 every month on your everyday purchases, but repay the amount immediately.

Consumers should never look to obtain credit builder credit cards to use them like a regular card as this will only cause further troubles. The high interest rates are usually on a par with store cards, and this could cause your debt to further spiral. Borrowing for a long time, or for large amounts of money, should always be avoided with this type of card. Once you qualify for the best credit card offers, you can start using credit cards normally if you wish. ALWAYS remember that you will have to pay the money back.

The future

After around six months of sticking to a strict “buy and pay” routine with your credit building card, you should be at a point where you can apply for a standard card. This is fantastic news because it will have a dramatically-reduced interest rate and will mean you have access to some of the best credit card deals. The 30% APR will be long gone, and you may even be able to take advantage of some of the 0% purchase and balance transfer credit card offers.

Once you have your shiny new credit card, close the old account as you will no longer have any need for it. Don’t go wild with spending on the new card, use it wisely still. The purchases you make with your credit card will continue to influence your credit score, so be responsible.