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Credit Builder Credit Cards: How do they work?

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Consumers who’ve had problems with debt in the past will have negatively affected their credit rating. This can cause issues in the future, even if their financial situation is more stable. One way of starting to improve a credit score is to apply for a credit builder credit card, but how do these work?

What is a credit builder credit card?

Consumers with a bad score or no previous credit history are unlikely to be accepted for some of the more beneficial credit cards with low interest rates. Lenders assess the risk that a potential customer poses to them by looking at their past credit accounts. They then use this to decide whether or not to accept their application. The best deals are reserved for those with excellent scores.

With a credit builder card they can have access to a small amount of credit and use this to prove that they’re a responsible borrower. By regularly using and paying off the balance on their card, customers can start to build up a more positive credit score. This proves that they’re a more reliable and less risky customer who can manage their money and use credit correctly. This will mean they’re more likely to be accepted for the better deals with lower interest rates.

How can a credit builder card help?

Even having no credit history can be a problem for lenders, as they’ve no previous records to base their decision on. Therefore, these applications are often treated in a similar way to customers with a bad credit rating. By opting for a credit builder card, consumers can build up a history, which they can then use to apply for cards with lower rates.

Lenders don’t want to take the risk that someone with a previous bad record of making repayments will default on their card. This is why applicants with a low credit score are usually turned down for the best deals. Using a credit builder card correctly over a period of a few months can show a lender that they’re a more trustworthy customer and lead to them being approved for better deals in the future.

Disadvantages of credit builder cards

As they’re aimed at those with lower credit scores, these types of cards generally come with high interest rates. However, they are designed to be used to build up a credit score, rather than as a means of easy credit. Therefore, if they’re treated in this way and paid off in full every month, no interest will be charged. A credit builder card is beneficial to help rebuild a credit score, but it can also adversely affect it if payments are missed or are late.

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Customers who are accepted for credit builder cards are usually given a fairly low limit to start with, sometimes just a few hundred pounds. This small amount will allow them to spend within their means, so they can pay the balance off on time. The purpose of these cards is not to borrow money over a long period of time, as this will quickly get a customer into large amounts of debt due to the high interest rates. The account should never be at its limit, as it’s not worth the risk of not being able to pay it off.

Credit builder credit cards should never be used as a way of borrowing money, as the debt could soon get out of control. However, they are an effective means of building up a poor or non-existent credit score.




About Catherine Stern

About Catherine Stern

Catherine Stern is a freelance writer with a background in marketing and PR. She currently writes web content on a range of subjects, from finance and business to travel and home improvements. As a working single mum of two young boys she understands the pressures that today’s working parents face and the topics they want to read about.

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