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Singing a credit building credit card can help you improve your credit score if it has been damaged in the past by late or unreimbursed payments.
Your credit score reflects your credit history, showing the ins and outs of your financial past. It pays to keep it in the best shape possible to prove your creditworthiness to lenders, keeping your options open for future loan needs.
To make a credit card work, you’ll have to stick to the rules, but as long as you do, it can take you one step further toward a reputable credit record that will put you on the ‘good books’ of most lenders.
Here’s what you need to know about the offers.
What are credit building credit cards?
If you have a bad credit file, conventional credit cards are unlikely to be available to you. However, credit cards are specifically designed for borrowers who have previously been in financial trouble, but now want to show that they are responsible.
While these cards offer a good chance of getting the green light, they come with lower credit limits and higher interest rates. Annual Percentage Rates (APRs) tend to be between 29% and 59.9%.
What providers offer them?
Credit card providers include Aqua, Vanquis Chrome, Marbles, Barclaycard, and Origin. For a complete list, head over to a credit card comparison service.
Why is it important to have a good credit score?
If you have bad credit and a below-average score, getting anything from a cell phone contract to a mortgage can be difficult.
By taking steps to improve your credit file in any way possible, you will unlock access to better deals (subject to eligibility and approval) in terms of interest rates, fees, and benefits.
What if I don’t have a loan history?
If you’ve never had any type of credit before, like a mortgage, loan, or credit card, you won’t have any credit history. And this means that you will need to build it from scratch. Applying for a credit card and using it responsibly can be a good way to go.
Do Credit Cards Really Work?
By spending on your card and making at least the minimum payment each month, you can create a record that shows that you can be trusted, increasing the likelihood that more lenders will grant you credit in the future.
However, the most important thing is that you will have to adhere to the rules, such as making your monthly payments on time, never spending more than you can afford or exceeding your credit limit.
The long-term effects of having more debt will negate whatever good you are doing by taking these cards and this is compounded by the higher APRs the cards charge.
Top 5 Credit Card Traps
Missing payments: It is essential that you make your repayments on time and pay at least the minimum amount, or you will do more harm than good to your credit score. One way to guarantee this is to set up a direct debit.
Overspending: It is very important that a credit card does not facilitate more debt. Don’t spend more than you can afford each month, even if your credit limit is higher than what you asked for or need.
Making only the minimum payment: The minimum payment required on any credit card is tied to low levels, often around 1% to 2.5% of the balance. Always pay more than this if you can. It means paying less interest, paying off debt faster, and it can even help your overall credit score.
Breaking (or pushing) your credit limit: Stay within your credit limit by keeping track of your expenses, whether it’s through online banking or an app. In fact, the lower the proportion of your assigned credit limit that you use (known as credit utilization), the better. Balances below 30% of your limit can translate to an additional 90 points on Experian credit reports, for example.
Withdraw cash: Avoid making cash withdrawals at all costs. Doing so attracts hefty fees and interest from the card provider from day one, even if you pay off the balance at the end of the month. You will also be charged a cash advance fee. And, in addition to being an expensive way to access cash, lenders might interpret it as an indication that you are still struggling with your debts.
Find the correct card
If you still think a credit card is right for you, compare the offers carefully using a comparison service.
When you find a card that’s right for you, use an online eligibility checker to check your chances of being accepted. This will ensure that your credit score is not further damaged if it is rejected.
Please note that the advertised APR might not be what you are being offered as only 51% of applicants need to qualify for the rate that companies promote as their typical or representative APR.
It could still be accepted for a credit card, but at an even higher rate. However, this will not matter if you plan to pay the balance every month.
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