How to improve a poor credit rating with a credit card
WHICH credit cards are suitable for people with past credit problems or those who are new to credit?
Find out in this guide, as well as getting more information on how credit cards can help to build - or rebuild - a credit profile.
There's no short cut to building a good credit report: lenders like to see a long history of reliable borrowing behaviour.
But that doesn't mean it's not possible to pick up extra credit (sorry) on the journey: taking out a credit card and using it sensibly (that is, without missing payments or exceeding the credit limit) is one good way to start improving a credit score.
Here are some of the cards currently open to applicants with poor credit scores:
There are more than this; search for more credit builder cards in our main comparison table here.
Credit building: the basics
"Credit building" is a bit of a misnomer. Credit files aren't mountains for people to climb, with a "perfect score" waiting at the summit, somewhere up in the clouds. There are two reasons for this.
First, everyone uses different methods to assess someone's credit history. An established bank, for example, will have access to more information than a new lender - and they may both use different credit reference agencies than other lenders.
Second, lenders accept and reject applications based on profit as well as risk. So even people we might regard as having "perfect" credit ratings - people with a long history, who have never paid interest - can be rejected.
Such people are less likely to generate a decent profit - and that's not what that particular lender is looking for.
But that doesn't mean there's no point trying to improve our credit profiles. There are still better and worse histories, and things that can transform one into the other - there's just no such thing as a universally perfect credit profile.
In general, though, a stable history of borrowing is key.
Why credit cards?
Having a current account overdraft, paying "contract" bills like the monthly mobile bill, and, of course, other borrowing such as personal loans can all be taken into account when looking at a credit history. So why build up a credit history with cards in particular?
There are three reasons.
1. Regular borrowing
A credit card is a form of regular borrowing that doesn't have to cost anything.
Holders could have and use their card for years and, as long as they pay the balance in full every statement period, never pay a penny more than the cost of any purchases.
In contrast, there's no guarantee these days that an arranged overdraft will protect its holder from interest and/or fees for borrowing - which, lest we forget, is basically what an overdraft is.
It is, in any case, a much less clear form of borrowing, and harder to see on many credit reports.
2. Easy(ish) to increase and decrease credit limits
As long as they don't tempt cardholders into expensive borrowing, credit cards with a large credit limit can be useful in credit score terms: it looks good to have been accepted but to have borrowed a proportionally small amount, as opposed to being maxed out.
On the other hand, some people worry that having too much available credit can actually be harmful when they're looking to borrow elsewhere. Lenders may well get nervous about all the borrowing potential already at the applicant's disposal.
But it's easier to ask for a credit limit to be reduced, or to completely close the account all together, than it is to do similar with almost any other financial product - so they're useful in this respect too.
3. First step for poor histories
Most cards offering options for those with "poor" histories - and increasingly also for those with "no history" - are expensive.
However, as we noted above, when used carefully, credit cards can be used free of charge - and, as we'll see below, lenders are increasingly targeting people who need to rebuild damaged credit histories.
Some lenders even accept those who have had serious debt problems such as County Court Judgements (CCJs - covered in our guide here) for non-repayment of debt, or bankruptcy in the past. For more on borrowing after debt, have a look at this article.
Credit building cards
Credit building cards are nothing particularly special; there are rarely specific features which make them especially good for credit building. Instead they tend to be designed to try to encourage responsible use over a long period of time.
Nevertheless, even those with good histories - and especially those with only no bad history - should pay close attention to the application criteria before submitting their details.
Every application for credit is recorded on that person's credit report, whether they're accepted or not, and will be visible to other lenders.
Making another application straight away is ill-advised, and applying for several lines of credit in quick succession will really set alarm bells ringing among the providers, making the chances of getting accepted even smaller.
We've a guide for those who have been rejected here, which explains what to do next, as well as covering the rejected applicant's right to information regarding the decision.
First time credit card applicants should be particularly careful - have a look at our guide for first timers here.
As we noted above, there are also a select number of credit cards on the market designed especially for those new to credit - those with no, or hardly any, credit profile - and for those with past problems who may have difficulty obtaining mainstream credit.
These are the cards generally referred to as credit rebuilding cards; we've collected examples of them in the table above.
It's notable that these cards tend to have high rates of interest, typically double that of mainstream credit cards.
The credit limits are often quite low - sometimes as little as £100. Even so, with interest rates this high it's worth limiting purchases made with them to those that would otherwise be made using cash or a debit card, and making sure that amount is kept aside so it's always possible to clear the balance in full.
Over the past few months, we've noticed that credit rebuilding cards have become more likely to offer rewards, and even 0% periods on purchases, for new account holders.
This is a new and somewhat surprising development, something which we've speculated about elsewhere.
Some of these "reward cards" offer a good value return on everyday purchases. However, the extra incentive to use them for spending only makes the point we made above all the more important: the interest rates are high, and repaying in full is preferable.
This is doubly the case where these cards offer 0% purchase periods. They tend to be short, often only three months, and the standard 'go to' interest rate for any balances not cleared at the end of them is incredibly high.
There is an argument that these cards offer free and accessible short-term borrowing, which, carefully repaid, could be really useful. But we can't help but see the potential problems these sort of promotions could cause.
Poor history card providers
Some providers pop up more than once in the table above.
While their cards are much more basic, they still offer the benefits extended under law - such as Section 75 purchase protection - and, of course, that vital, vague and often unadvertised benefit: the opportunity to rebuild credit history.
Note, however, that Vanquis don't subscribe to the Lending Code, which covers a variety of commitments to dealing with customers - and most importantly commits signatories to protecting their customers against fraud liability.
Alternatives to credit cards
For people who've had really serious debt problems a credit card may not be the best way to rebuild a credit score - or, more accurately, a credit card won't be the best way to rebuild credit, because being accepted for one will be almost impossible.
But there are alternatives.
The CashPlus Prepaid Creditbuilder card is one such alternative.
For a start, there's no credit check. Creditbuilder customers just need to supply proof that they are UK residents and aged over 18.
The card works by "loaning" the account holder a year's worth of monthly card fees upfront.
The cardholder then makes 12 monthly payments to cover those fees, at the end of which time, details of what counts as a fully repaid loan are passed to two credit reference agencies, including Experian.
Most banks and utility companies use Experian for credit checks, so it's a good way to build a history of using credit without having a credit card.
For more information on this option see our full review.
It's also worth noting - and this is something we talk about more fully in our credit history 'diet' article - that any form of financial rebuilding, even managing a current account well,counts towards slowly rebuilding a better credit history.
But people with serious money problems - especially those who have been declared bankrupt, whether within the past 12 months or who are now discharged (that is, they were declared bankrupt more than a year ago) - will find it hard to get any kind of bank account.
There are still options, including the basic bank account - which we look at further in this article.