Credit building cards help people with poor or limited credit histories improve their credit rating.
In a nutshell, credit building cards help you build your credit score. But, why is your credit score important, and why would you want to build it?
Credit card issuers assess everyone who applies for credit in the UK. Evaluating applicants makes good business sense since they only want to lend to those who will repay, but lenders are also legally obliged to ensure their customers do not borrow in an unsustainable manner. To do this, they need to build a picture of the financial situation of everyone who applies for one of their products.
Of course lenders don't have information about every prospective applicant, so they rely on external sources for the data required to inform their decisions. Different card issuers use different data sources to complete this process, but the most important sources for lenders are the credit files available from the UK credit reference agencies.
There are three main credit reference agencies (CRA) in the UK (Call Credit, Equifax, and Experian). Regulated by the Information Commissioners Office (ICO), CRAs compile and maintain records of everyone in the UK. The data they collect varies slightly, but each CRA tries to offer lenders the information needed to make sound lending choices, and much of this data is common to them all.
Publically available information
The publically available information that CRAs collect helps lenders confirm that applicants are genuine and have not had legal proceedings undertaken against them due to credit defaults.
The UK electoral roll is available to businesses that pay for it. The information it contains helps confirm applicants name and address, as well as demonstrating that their residential status is relatively fixed (they are less likely to run off with a lender’s money).
County Court Judgements (CCJs)/Decrees
County Court records show court rulings against people who have unpaid fines and debts and those who have been declared insolvent (bankrupt) by the courts. Courts tend not to be involved with debt repayment until other routes have been explored, so if you have a court record, it indicates that you are a pretty bad risk for the lender.
Individual Insolvency Register
The Individual Insolvency Register is maintained by a UK Government agency (Insolvency Service) and contains details of all bankruptcy, debt relief orders, and Individual Voluntary Arrangements (IVA). As with CCJs, people appearing on the Individual Insolvency Register present lenders with a high risk of default.
National Fraud Database
The National Fraud Database is collated by Cifas (Credit Industry Fraud Avoidance System) and seeks to identify perpetrators and victims of fraud. If you are a victim of fraud, this will not prevent you from getting credit, although the additional checks creditors undertake can slow the application process. However, if you have been convicted of fraud, you will probably be ineligible for credit and be declined.
Personal Financial Information
If you have had a credit relationship with a business, they will share details of your credit agreement and credit history with CRAs. Customers agree to this data sharing in the small print as a condition for getting credit, and it provides a useful source for lenders to understand your approach to credit. Data shared with CRAs include:
This data is of a highly sensitive nature, so it securely managed, and only shared in particular instances.
Using the credit file data, lenders can gain a good understanding of the risk a given applicant presents and decide whether or not they should extend credit to them.
Where lenders choose not to offer credit, it is because they have identified something that concerns them in the applicant's credit file, but what?
Credit files can be hard to comprehend, so CRAs have attempted to help people by developing scoring systems to show people their likelihood of getting credit at a glance.
Lenders don't use these scores directly, but they are calculated using the same information lenders use and as such offer a useful substitute for understanding their rationale. So, if you have a 'low credit score', you are less likely to be accepted for credit, because you present lenders with a higher risk than other customers. Therefore, when we talk about 'building credit', we are referring to the process of increasing the scores CRAs have assigned us - and, therefore, increasing our chance of being accepted for credit.
One of the main reasons you might have a bad credit score is because of defaults on debts you've previously had, and the only way to remedy this is by demonstrating that you have changed your ways. But, the Catch-22 here is: If you have a bad credit score, how can you convince a lender to let you borrow, to help to demonstrate that you have indeed changed your ways?
Fortunately, even if you present a higher credit risk, you still have some options. In fact, there are many credit cards designed to help people escape the credit score Catch-22 (where you can't get the credit needed to demonstrate a responsible approach to credit). These cards are collectively known as 'credit building cards'.
Credit building cards are very similar to other credit cards, with many of the same advantages, including:
Some credit building cards even include benefits traditionally reserved for people with a good credit status, including:
However, despite the benefits, people getting credit building products do present credit card issuers with an increased chance of financial loss. As such, products are designed to reduce this risk. They do this in two main ways.
Firstly, they ensure that customers are unable to borrow to unsustainable levels by limiting their available credit, with low credit limits.
Secondly, they understand that some people will struggle to improve their credit management ability and as a consequence, the lenders will lose money. As such, they only make credit available at higher rates of interest. This acts as a deterrent to some people, who are less likely to apply unless they are relatively certain they can meet their obligations. It also means that paying customers pay more. So credit card issuers can offset losses from some customers’ business against higher returns from others.
Every credit card has different eligibility criteria. Credit building card requirements are lower than many other products categories, but people are still regularly rejected. Unfortunately, having your application rejected makes lenders even more wary of offering you credit, so you should treat applications carefully and check there are no obvious reasons why you'll be declined before applying. Common reasons for rejection include:-
Everyone's situation is different and different cards are more or less suitable depending on your circumstances. That said, if you're serious about rebuilding your credit score, you should focus on the products that make this more likely.
Some credit building cards offer features like 0% balance transfers and 0% purchases, which can be useful. However, if you think that these are likely to distract you from your primary motivation, or encourage you to increase your levels of debt needlessly, you should steer well clear of them - opting for a straightforward product instead with free payment alerts and reminders. Some credit building products also include free access to your credit report, which can be very useful for tracking your progress over time.
Although credit building credit cards are one of the most common ways to rebuild your credit score, they are not the only way to do this. Certain prepaid cards (which are similar to debit cards) offer opportunities for credit building. These products differ from credit cards as they need to be preloaded with cash before they are used. This reduces their flexibility and means they offer you less consumer protection than you’d get from a credit card, but it does mean that you're unable to run up high borrowing - which can be useful.
Probably. However, your credit score is only a numeric representation of an enormous amount of data. It is a useful guide, but not in and of itself a guarantee for approved credit. Every lender has unique and specific requirements, and, to be successful, you must meet these.
Yes. Most UK lenders use a system of 'risk-based pricing', which means they offer weaker products to those they expect to be less creditworthy. This could mean they reduce the duration of any 0% balance transfer available and/or increase the rate of interest they charge you. Legally, they only have to offer the advertised rate to 51% of customers, so don't be surprised if the deal you're offered differs.