A reader asked:
I’ve recently paid off my 2 defaulted credit cards and I have been paying into Loqbox for the past 4 months (£70).
I got an email from Clearscore saying I can get a Capital One credit card. This is the first time in a long time that I have been offered a credit card because my credit has been so poor but it is slowly improving.
Should I apply for this? If I do what is the best way to use the card to improve my score?
Four million people in Britain have a credit card specifically aimed at people with a bad credit rating. These cards have interest rates of 30-70%. A standard interest rate on a normal credit card is about 20-25%.
Brands include Vanquis, Capital One, Aqua, Ocean, Marbles, Zable and 118. Some normal credit card lenders like Barclaycard have a specific bad credit product available. They are all much the same – except for the interest rate…
They may be called bad credit cards, sub-prime credit cards, credit-builder cards or second-chance cards. Different names, same thing.
Whether they work well for you depends on your situation and how you use the card:
- will you end up in heaven with a better credit score?
- or in hell with expensive, mounting debt leading to more defaults?
Do they really improve your credit score?
How to maximise your credit score gain
Use a credit card well and your credit score goes up. To get the biggest boost to your score:
- Use the card once a month for something that is less than a quarter of your credit limit, such as a tank of petrol.
- Set the card to repay the full balance every month by direct debit.
- Know when the direct debit is collected and make sure there is the money in your account for it.
- Most lenders let you change the date, just after you are paid is often best.
This is the best way to maximise your credit score – using the card, but never too much and never running a balance.
When the card is repaid in full every month, you never pay interest on normal purchases, so the high interest rate doesn’t matter. (The exception is if you take cash out on the card. Then you have to pay interest right from the day you withdraw the money.)
There is no need to buy lots of things, just one purchase a month is fine. Leave the card at home after you have used it and don’t add it to your online shopping accounts – avoid temptation!
There is a myth that you need to pay interest to improve your credit score – this just isn’t true.
How much will your credit score improve?
This depends on why your score is bad.
You may have a “thin credit record” with little on there. Perhaps you have never had much credit or all your old problems have dropped off after six years.
Here a credit builder card can make a big difference, not immediately but after a few months. See How much will my credit score change if… for details.
But if you have a lot of defaults or missed payments, it will take time for your score to improve a lot. This new card won’t make a big improvement right away. As your problems get older, new good marks on your credit record will help your score increase.
Don’t get two cards. It will take longer before you see any gain at all and you won’t see twice as much gain.
These cards can be dangerous
If you don’t pay off the balance in full you end up with expensive debt.
Only paying the minimums means it can take 15 or 20 years to clear a credit card balance. That £25 pair of shoes can cost you £50 or even £75.
And if you have to borrow more to make the repayments, you fall into a spiral of ever-increasing debt, leading to defaults and disaster for your credit rating. The opposite of what you wanted.
Here is what one Debt Camel reader said about his card:
“it’s a card that puts you more and more in debt rather than builds your credit rating”.
These problems are very common. The regulator found that 25% of these credit builder card accounts had serious arrears after only a year.
So … should you get a credit builder card?
It helps to be clear about why you want the card. And be honest with yourself about how tricky your current situation is.
Are your finances getting worse?
If they are, then this is your problem, not your credit score.
Get a credit builder card when you are struggling and it’s very likely you will just run up more debt and as it’s expensive, it will make your situation and your credit score worse.
Instead you need to talk to a debt adviser, see The Better Alternatives below.
Only to repair your credit record?
For people in an improving situation, feeling confident they are in control of their money, it comes down to willpower.
It sounds as though the reader who asked the question is in a pretty good place at the moment. She is working her way out of her previous difficulties. She is saving every month in LOQBOX .
So she probably isn’t going to max out the card immediately because she is in trouble. But will she be able to stick to the rules to maximise her credit score and never pay interest?
If she is confident she can, then yes, get the card now.
Or will she be tempted to put her Xmas spending on the card? Or use it for a bargain she has just seen in a sale?
Some people are overly optimistic that they will be able to say No to this sort of temptation… Even though they know that in the past they have had problems.
If this sounds like you, you can make your life less stressful in future by not getting the card in the first place. The reader’s credit record will carry on improving over time even without it!
As a safety net – just in case?
Don’t do it.
To have a high interest card that you will use if things get difficult is setting yourself up to fail. Because when you use the card and can’t repay it in full, each month gets harder, not easier.
You need the extra credit
Don’t do it.
Most people get one of these cards knowing they will use it to borrow. Sometimes it is for one specific thing, often it is general pressure with bills and other debts. Any credit score improvement will be a nice, but the real reason is card is wanted is to use the extra credit.
This is too often a disaster because of the large amount of interest that is added.
The lenders will often increase your credit limit. But that short term relief gets you deeper into debt. As two StepChange clients said:
“The credit card company just keeps feeding the rope to you for you to hang yourself”.
“I would have been better off going to a food bank or borrowing money from family”
The better alternatives
Let’s be clear, you aren’t being offered a “second chance” because the lender is feeling kind.
They know you will be tempted to use that shiny new credit card. And they hope you will find it hard to pay it all off because then they will make a lot of money out of you.
Two better alternatives for credit building are:
- LOQBOX – that is a risk-free way to improve your credit score if you can make monthly savings
- Experian’s Boost facility. That has the big plus that it can’t harm your credit score or get you into more debt.
A better alternative safety net is to put some money aside in savings. 7 ways to save – which will work for you? looks at options for saving, no one way is best, it has to fit your habits.
A better alternative if you are in a difficult situation now is to talk to a debt adviser. Phone StepChange on 0800 138 1111. They can talk about your options and explain the pros and cons of each so you can decide.