Did you know you can use credit cards to rebuild credit? A credit card can be used to rebuild your credit score in several ways. By applying for the correct type of card and using it responsibly, you will improve your credit history and boost your score.
Below we explore the various card types and how they should be used. We will also examine how to best utilise your existing cards.
The best way to use credit cards to rebuild credit
Credit cards are a useful safety net and are frequently used for big purchases. This is due to the payment protection they can offer.
However, they make it easy to accumulate debt. Sometimes the temptation of a big available balance is just too much.
The trick is to repay the balance in full each month. Otherwise, you will be charged interest on the balance.
Never take out a cash advance using your credit card as it is expensive and damages your credit file. Using your credit card in a cash machine leaves a mark on your file that will raise an alarm with lenders.
It makes it look as though you have spent all the money in your current account and are having to rely on credit to get by.
Existing credit cards
If your credit card is maxed out or sitting close to the limit then this doesn’t look good on your credit file. You should aim to pay it off as soon as possible.
Lots of credit cards also negatively impact your score and so you should review the annual interest rate on each card. Try to pay off the one with the highest interest first.
Comparing the APR
APR stands for Annual Percentage Rate. It is the rate of the interest charged on the amount borrowed if it is not paid back over the course of a year. Used for credit cards and other financial products it makes it easier to compare them.
For example, if you spend £1000 on a credit card with a 12% APR, you will pay back £120 in interest over the year if you don’t pay any of the money back.
Consider a balance transfer
If you have a long-standing card with a low-interest rate on it then consider a balance transfer. Debts with higher interest rates can be moved to the card with a lower rate, potentially saving you hundreds of pounds on interest.
Long-standing credit cards
While a lot of credit cards do not look good to lenders, long-standing financial relationships do. If you have had a card for a while then consider keeping it open and repaying the balance in full each month. This will build a healthy credit history and provide a level of financial stability that lenders like.
Try and use a credit card more like a debit card. Always keep your budget in mind before making any purchases on it to ensure you have the funds to cover the balance when your monthly statement comes in.
Credit Rebuilder Cards
When rebuilding credit it is not advised to apply for more credit unless it is part of your plan to improve your file.
When you apply for credit it leaves a footprint on your file. Too many footprints and lenders will assume that you are desperate.
A credit rebuilder card is one designed for people with no credit history or poor credit. Even if you have a CCJ, defaults or bankruptcy on your file then you may still be eligible for this type of card.
They typically offer a low balance at first, increasing as you make regular repayments and they are usually subject to higher interest rates of between 30-50%.
Offers for new customers
You may be eligible for new customer deals such as cash back or 0% interest on spending for a limited period so it is worth shopping around.
Whatever card you go for, do not miss any payments and always pay it off in full every month.
Checking the APR
When considering the interest rate, the advertised interest may not apply to you.
The advertised APR will be given to 51% of people that apply for the card. The other 49% will be subject to a different rate, usually higher. This is based on the level of risk that the lender assumes when it lends you money.
Prepaid Credit Cards
If you have been turned down for a credit building card then your only option is a prepaid credit card. These cards do not usually require a credit check and so it is very likely that you will be accepted.
Like with most prepaid credit cards you load it with money first, although the credit builder option comes with a price.
In return for a monthly fee and regular monthly repayments, the lender will report the loan successfully paid off after one year, giving you some good history on your file. The cost is usually around £70 a year.
It is not clear how effective this type of card is for rebuilding your credit, although if you are willing to pay the charges, some good history on your file is better than nothing.
Other ways to boost your credit
You should also focus on making other positive improvements to your file, many of which we covered in our article on taking the first steps to rebuilding your credit.
- Check your credit file regularly
- Correct any errors on your file
- Apply to be on the electoral role
- Don’t change your address too frequently
- Make all repayments on time
- Try and pay above the minimum payment
- Reduce the amount of debt that you owe
- Do not apply for more credit
Summary: use credit cards to rebuild credit
The thought of using a credit card to rebuild your credit can often seem scary. However, there are credit cards on the market that will help you build a better credit score. Use them sensibly and you will see things improve over time.
In our next article, we explore the specific credit cards currently on the market that are aimed at helping you rebuild your credit.