A reader asked: “I’ve seen advice to improve my credit rating after a Debt Management Plan by getting a “bad credit card” and repaying it in full every month. Would it be a good idea to get two of these cards? I don’t want to borrow any money, just to get a better credit score.”
This is a good question! Let’s start off by looking at why getting a bad credit card such as Vanquis is often suggested as a way to improve a credit rating.
How a “bad credit card” helps some people
After debt management or any form of insolvency (bankruptcy, a DRO, or an IVA), your credit record will be very poor because of all the defaults. These defaulted debts will drop off your credit record after six years, but at that point there will be little showing, perhaps just a couple of utility payments. That is called a “thin credit file”.
Lenders don’t like a thin credit file as there is no evidence that you can manage credit responsibly. So even though your credit score will have jumped when the last default goes, it may still not be up to very good.
This is where a bad credit card comes in. With the defaults still showing, a “good” card won’t touch you, but you can get a bad credit card. Once you have one, use it every month and repay it in full every month. That way you don’t pay the very high interest, you don’t get sucked into hard to manage debt and you start getting “ticks” added to your credit record each month. When the defaults disappear, your credit record is now looking good, not empty!
(NB bad credit cards won’t help improve your score if you already have loans and credit cards that haven’t had defaults. They are only helpful to people who don’t have existing credit.)
So does it make sense to get twice as many “ticks” by getting two of these cards?
Lenders don’t like you taking out lots of new credit
Lenders are fussy! They don’t like to to see you without any credit, but they also don’t like you to take out new credit! So when you take out a new form of credit, your credit score normally drops.
If you have just opened one account, and you make the monthly payments on time, it normally starts to have have a positive effect on your credit score after three months.
But if you open two accounts at the same time, this positive effect is delayed, and you won’t see your credit rating improve for about six months.
NB These timescales are a rough indication. A lot will depend on what else is happening on your credit record as well. For example if you borrow the maximum amount on this new credit card and only pay off the minimum, this will cost you a lot of interest and lenders won’t like it:
- lenders prefer you to have lots of spare unused credit showing; and
- it’s better if you are paying more than the minimum.
So if you want to see your credit score improve fast, only get one of these bad credit cards. After six months when you could apply for a new card, your credit score should be improving nicely, so at that point it makes sense to wait until it is high enough to get a “good” credit card!
You can use MSE’s Credit Club to see whether you would be likely to get approved for a particular card. That is a “soft checker” that won’t leave any mark on your credit file. At this point it’s really important that you avoid applying for something and being refused, as that will also harm your credit record for another six months.
Perhaps lenders don’t like these cards?
You may be wondering if lender think “bad credit cards” are, well, bad… The answer is a lender can see what type of credit you have – a loan or credit card – but they can’t see who your current lenders are. (There is one exception here – payday lending is flagged up, so a lender can see if you have had payday loans.) So a future lender can’t tell the difference between a Vanquis card and an Amex Platinum card.
The reason I am suggesting that you should get a “good” credit card later on is that they are simply less expensive if you ever do have to use them to borrow more money.