How to improve a credit rating with a credit card
WHICH credit cards are suitable for people with past credit problems or those who are new to credit?
Although there's no short cut to building a good credit report there are ways of improving our credit scores, whether we are new to credit or have a poor credit history.
This guide provides information on the basics everyone needs to know about credit building and gives an insight into why credit cards can be a really good option for building credit. And for those struggling to obtain a credit card, we go through some other options that can help improve credit ratings.
To begin, the table below shows some of the credit cards that are currently open to applicants with poor credit scores.
For a full range of credit builder cards, take a look at our main comparison table here.
Credit building: the basics
We all know that having a good credit history is beneficial and that some people need to build their credit to improve their credit score.
But the term credit building is a bit of a misnomer. There isn't a predefined perfect score for someone's credit file, because when it comes to credit nothing is black and white. There are two reasons for this.
Firstly, all banking institutions use different methods to assess someone's credit history. An established bank, for example, has access to more information than a new lender, and different lenders may use different credit reference agencies.
This means that there is not a fixed list of requirements that everyone must meet for every application - including how healthy their credit score is.
Secondly, lenders accept and reject applications based on profit as well as risk. So even people who we might regard as having a perfect credit rating - those with long histories who have never paid interest - can be rejected.
This is because some credit card lenders are more motivated by profit than others, and people with a history of careful credit management are less likely to generate a decent profit for them.
Remember that there is a difference between a 'good' credit history and a credit history that technically has nothing 'bad' recorded in it.
In a lender's eyes, an actively 'good' credit history is likely to be one where the borrower has actually used quite a lot of credit but has shown no evidence of problems, such as late repayments, minimum payments or frequent credit applications.
On the contrary, having nothing 'bad' recorded in a credit history can be an indication to a lender that the borrower has little or no credit history at all, which makes it hard for them to assess an application.
Applicants can therefore find it hard to borrow credit if they have very little or nothing on their credit file.
Those wishing to take out credit should also carefully read the application criteria for the card before applying.
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 set alarm bells ringing among the providers, making the chances of getting accepted even smaller.
But despite the vagaries, it is still a worthwhile exercise to try to improve our credit profiles. There are things that can transform a poor credit history into a better one - there's just no such thing as a universally perfect credit profile.
Why credit cards?
Many of us have credit in some form or another - whether it's a current account overdraft, a contract bill for a mobile phone or other borrowing such as personal loans. They can all be taken into account when looking at a person's credit history.
So why build up a credit history with cards in particular?
Amongst the many reasons, three standout ones include:
1. Regular borrowing
A credit card is a form of regular borrowing that doesn't have to cost anything.
Holders can use their card for years and borrow regularly, and as long as they pay the balance in full every statement period they never pay a penny more than the cost of any purchases.
Remember that an arranged overdraft attached to a bank account, which is essentially a form of borrowing like a credit card, does not protect its holder from charges. Many banks charge interest and a fee when an account holder dips into their overdraft. They are also harder to see on many credit reports.
The benefit of borrowing with a credit card is that the terms of borrowing include a period in which repayment can be made interest free.
2. Ability 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 beneficial for a person's credit score. It looks good to have been accepted for a large amount but to borrow a proportionally small amount, as opposed to being maxed out.
On the other hand, some people worry that having too much available credit could actually be harmful when they're looking to borrow elsewhere. Lenders may get nervous about the borrowing potential already at the applicant's disposal.
But it is easier to ask for a credit limit to be reduced or to completely close an account altogether than it is with almost any other financial product. So credit cards are useful in this respect too.
Therefore, the flexibility that credit cards provide with regards to increasing and decreasing available credit limits can make them a good option for those who require credit.
3. Credit rebuilding
For people with a poor credit history or for those with no credit history at all, credit cards can be very expensive.
However, as noted above, when used carefully credit cards can be used without paying any interest and 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.
Barclaycard offer some of the best cards for those with poor credit because they include some of the features offered in mainstream deals, such as rewards and interest-free periods.
Vanquis, who partner with Argos and Black Diamond, and aqua are also very well known for offering credit builder cards. While their cards are much more basic, they still offer the benefits extended under law - such as Section 75 purchase protection.
Note, however, that Vanquis does not subscribe to the Lending Code, which covers a variety of commitments to dealing with customers - and most importantly commits signatories to protect their customers against fraud liability.
The table at the top of the article has some more good examples of credit rebuilding cards. Take a look by clicking here.
It's notable that these cards tend to have high rates of interest, typically double that of mainstream credit cards, and that their credit limits are often quite low - sometimes as little as £100.
With high interest rates it's worth limiting purchases to small transactions, such as those usually made with cash or a debit card, and making sure that the full amount is kept aside so it's always possible to totally clear the balance each month.
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.
Prepaid cards 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 this period the details of the repayment, which 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.
The CashPlus Prepaid Creditbuilder card is a good example of this.
There's no credit check for applicants and Creditbuilder customers just need to supply proof that they are UK residents and aged over 18.
It's also worth noting that any form of financial rebuilding, even managing a current account well, counts towards rebuilding a better credit history. This is something we talk about more fully in our credit history 'diet' article.
However, for those people with serious money problems even opening a bank account can be difficult. This is particularly the case for those who have been declared bankrupt within the past 12 months or who are now discharged - which means that they were declared bankrupt more than a year ago.
For anyone in this position there are still options available. A good example is the basic bank account, which we look at further in this article.