Beginner's Guide To: Credit-building cards

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The Independent Online

How does this work?

Consumers who struggle with either a poor or limited credit rating could boost it with a type of credit or prepaid card that creates a positive loan repayment history. To do that, they grant you a small loan, sometimes interest-free, that you pay off every month. The fact that you are successfully paying off a loan is then noted on your credit history.

Who does it?

Credit-building facilities are available on credit and prepaid cards. Barclaycard’s CreditBuilder card and Capital One’s Classic card offer those with a challenging credit history the chance to borrow small amounts and consistently repay them on time to boost their rating. Credit limits start at £200, so you can’t go mad.

For prepaid cards, the process is a little more complex. The cashplus and Sterling prepaid cards will lend you around £60, interest free, which you pay off with a monthly fee, around £5. This doesn’t mean that you get £60 to spend, but that you’ve been lent the monthly fee in advance to establish a line of credit. These cards are not linked to a current account, you ‘preload’ money and use them like a debit card.

What is the catch?

They’re expensive. Capital One’s Classic card typical APR is a huge 34.9 per cent, compared to 9.9 per cent for their basic rate. Defaulting on the repayment or exceeding your limit will cost upwards of £12. Barclaycard’s Creditbuilder is offered at 29.9 per cent APR.

Credit-building customers have often struggled to repay debt in the past, so they are more likely to fail to pay the balance of their card off in full, and it’s here the providers make their money.

You pay a monthly fee for prepaid cards, but also plenty of other charges. The cashplus account has an application fee of £4.95, and a withdrawal fee of 99p in the UK. The Sterling card has an application fee of £8.95, and an ATM withdrawal fee of £2.50, while most other debit cards don’t charge you at all.

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