The Ultimate Guide to Credit Builder Cards for Bad Credit

Are you looking to build up your credit rating? Find out everything you need to know about credit builder cards for bad credit here!

What are Credit Builder Cards for Bad Credit?

Credit builder cards are intended for people with poor or no credit file who want to improve their credit score over time. Credit builder cards are also known as ‘bad credit’ credit cards and they usually carry low credit limits and higher-than-average interest rates. Having a healthy credit score is very important if you are planning to make a major purchase —buying a home, renting a flat, applying for a vehicle loan, or purchasing a mobile phone -- so choosing the right credit builder card can help you reach your financial goals quickly.

Who Are Credit Builder Cards Intended For?

Have you ever been turned down for a car loan or denied financing for an engagement ring? Anyone who has experienced it will tell you how frustrating it is to be told you don’t have credit or your score is too low to make a major purchase. If you have been refused credit it may be due to your credit score and therefore, a credit builder option like a credit card could be right for you. Having a low or poor credit score is something you can recover from with proper planning!

Common reasons you could be denied credit:

Failure to repay your bill(s) on time and in full
Accumulating a lot of unpaid debt
Maxing out your credit cards
Your income or employment status is unstable or not strong enough
Getting an Individual Voluntary Arrangement (IVA)
Filing bankruptcy or having a CCJ against you

Read, ‘Dealing with Debt: Overcoming a Court County Judgement (CCJ).’

Are Credit Builder Cards Effective?

Credit builder cards can be effective for individuals with no credit or poor credit history. As with every credit card, it’s important to make your repayments on time each month and stay well within your credit limit. Credit builder cards have high interest rates so do make sure if you spend any money on it that you can pay back any interest you might be charged. If you use your credit builder card well, your credit record should improve. A few things to stay on top of when using a credit builder card include:

Making all of your repayments on time in full
Don’t overspend the credit limit
Keep your credit utilisation rate under 30%
Maintain good financial behaviour

Helpful tip: If you want to build your credit score without getting into credit card debt check out our credit builder app, Pave Lite.

Pros & Cons of Credit Builder Cards for Bad Credit

Before committing to a credit builder card for bad credit, be sure to weigh the pros and cons with your unique financial situation.

Pros:

Give Your Credit Score A Lift

If used properly, credit builder cards for bad credit are very effective at giving your credit score a boost. But it's crucial only to use the card for purchases that you can fully pay back each month using your current account funds.

Protected Purchases & Refunds

Since credit builder cards are regulated by the FCA, your purchases on the card are protected in Section 75 of the Consumer Credit Act 1974. This means that if you buy something over £100 using the card but never received the item or service, you are entitled to a full refund*.

Increased Chances of Application Approval

Credit builder cards are designed for people with bad credit, which means that the affordability checks are easier to get approval on. Your chances of getting approved for this type of card are much higher. However, it’s still best to clear any CCJs or IVAs from your record before applying.

Cons:

Risk Going Further Into Debt

It’s important to carefully consider the risks of going further into debt. Failing to pay the monthly bill for a credit builder card can cause your credit score to dip even lower.

Lower Credit Limits than Other Cards

Credit builder cards typically have a lower credit limit than traditional credit cards in the UK. This is because the lender doesn’t want to lend money to someone who is unable to repay the debt.

Higher Interest Rates or APRs

It’s true that credit builder cards tend to have higher interest rates than common credit cards. This is because people with lower credit scores are considered to be at higher risk of missing payments by lenders. Lower interest rates are typically given to people with the best credit scores.

How do I Apply for a Credit Builder Credit Card?

Once you’ve evaluated and picked the right credit builder card for your financial situation, you’ll need to apply. Most cards can be applied for online via the lender website. Once you fill out an application, the lender will run checks on your credit score, current financial situation, and review your credit file to decide whether or not you are approved. Keep in mind that approval methods and criteria will vary by lender but credit builder products are typically designed for wider approval than other credit cards. It usually only takes a few minutes to be approved online for a credit builder card.

Helpful tip: Every time you apply for credit, a hard inquiry will be recorded on your credit report—temporarily lowering your credit score. Check your eligibility for a credit builder card before you officially apply. Most lenders have a tool where you can view your eligibility rating to help you understand your chances of approval.

What Credit Limits are Offered by Credit Builder Cards?

Credit builder cards do not typically have high spending limits, in an effort to prevent cardholders from falling further into debt. However, some credit builder cards do allow for increases in credit limits after a cardholder successfully makes on-time repayments for 4-6 months in a row. It’s important to note that credit limits are assigned on an individual basis, based on personal circumstances. An analysis of credit limits for credit builder cards by Pave revealed that starting limits typically range from £250-£1,200.

Remember if you want another way to build credit that doesn’t involve high interest rates or credit card debt - check out the app.

Here are a few examples of credit limit ranges on popular cards:

Aqua Credit Builder Card: starting credit limit ranging from £250-£1,200
Santander Credit Builder Cards: maximum starting credit limit, £1,200
Barclaycard Forward Card: credit limit between £50 - £1,200

3 of the Best Credit Builder Cards for Bad Credit in the UK

118 188 Money Credit Card: The 118 188 Money credit card does not charge any fees on a wide range of transactions from spending abroad to balance transfers and late payment fees. In fact, the card charges no fees at all. That's right, zero fees. With an initial £500 credit limit, the card also offers flexibility to keep your credit utilisation ratio in check. The 118 188 card carries a representative 34.0% APR (variable) interest rate.

The details:

Trustpilot rating: 4.7 out of 5.0 with 16,467 reviews
App store rating: 4.0 out of 5.0 on iOS
Interest rates: 34.0% APR (variable)
Fees: none - actually no fees at all.

Chime: The Chime card is a secured credit card (otherwise known as a prepaid card). This means that you must move money from your current account over to the credit card before you can spend on the card. The money that you spend on the Chime Credit Builder Card then gets paid off using the funds that you already transferred over. The benefits of this approach include limiting the risk of falling deeper into debt by missing repayments or overspending. The Chime card has no annual fees or interest charges since they are not actually lending you money.

The details:

Trustpilot rating: 3.8 out of 4.0 with 6,758 reviews
App store rating: 5.0 out of 5.0
Interest rates: n/a
Fees: none

Capital One Classic: The Capital One Classic card helps customers stay on top of payments by setting up alerts to remind you to pay the balance off. They claim that it is their most popular credit builder card. They typically award an initial credit limit between £200 to £1,500 with the option to increase the limit at least twice a year (if eligible). The higher limit helps improve your credit utilisation ratio. You will receive a 34.9% APR representative variable interest rate with the Capital One Card. This card has a poor rating on Trustpilot and has high fees that can add up but we included it due to the higher credit limit.

The details:

Trustpilot rating: 1.7 out of 5.0 with 565 reviews -- we recommend doing extensive research on your own before applying to any credit card
App store rating: 5.0 out of 5.0 with 4.1million reviews
Interest rates: 34.9% APR (variable)
Fees: £12 returned payment fee; £12 late payment fee; £12 fee for exceeding credit limit; 2.75% foreign usage fee; 3% cash withdrawal fee (minimum £3)

How to Avoid Hurting Your Credit with a Credit Builder Card

The Vanquis Chrome Card website includes explicit instructions on how to avoid hurting your credit with a credit card when they say, “to build your credit rating and be considered for credit limit increases, use your card sensibly, stay within your credit limit and pay your monthly minimum payment on time. Not doing so could harm your credit rating and make obtaining credit more difficult.”

The truth is that there is a risk of hurting your credit if you do not manage your credit builder card responsibly. To avoid hurting your credit, follow these tips closely:

Never spend more than you have in your current account
Pay the card balance in full each month
At the very least, make the minimum payment each month
Never withdraw cash from a credit card

When Should I Expect to See an Improved Credit Rating Using a Credit Builder Card?

Merely having a credit builder card does not guarantee that your credit will improve on its own -- it still requires you to be financially responsible and remain focused on the work needed. Credit builder cards are more accessible to allow people to more easily repair their damaged credit score or start one from scratch.

That being said, as long as you're able to meet the terms/requirements of your card (staying within credit limits, paying on time, etc.), your credit will improve over time. It's important to maintain employment and focus on keeping steady income. Luckily, there are more opportunities for remote employment and other ways to earn money than ever before.

On average, you should see improvements within 4-6 months of responsibly using your credit builder card. Just keep in mind that there are many factors that can affect this time frame, including:

Current credit score
Past payment history
Current debt
Employment status
Credit builder card terms

Research: Missing One Payment Increases the Risk of Default

Data from Pave shows that people who miss one payment on their credit card are more likely to default on their credit card than other bills. There are a few reasons for this; the first being that people are generally more likely to default on their credit card than on their utilities or failing to pay rent. Think of it this way -- when push comes to shove and you're having to decide which bill can’t be repaid this month, heating or wifi will probably be your top priority.

While this line of thinking is totally understandable, it's important to remember that getting into a debt spiral by spending too much on credit or letting credit card bills go unpaid can be severely damaging your credit score, which will harm your future buying power.

The second reason you are more likely to default on their credit card after missing just one payment is relatively simple: after missing one payment, you are endlessly playing the catch-up game unless you receive a serious influx of cash relatively quickly. This means you will be continually behind on your bills, always paying what was already owed and not what you currently owe. The situation is further exacerbated by the fact that missing a payment permanently increases your interest rates, incurs fees, and affects your credit score.

The chart below shows the probability of repaying bills from various providers if you continue to miss payments.

This situation is scarily common and can take serious tolls on financial and mental health. If you do happen to miss a credit card payment, try not to panic. Here are some steps you can take to mitigate the damage:

Contact the institution: banks and lenders don't want to continuously ring you for money nearly as much as you don't want them ringing you. If you miss a payment, call them and explain the honest mistake. If you handle it calmly, professionally, and clearly regret it, they will work with you to create a payment plan that's more manageable or even waive late fees.
Pay the minimum: it's always best to avoid missing payments entirely, whenever possible. Even if you are unable to pay off the full amount, paying the minimum goes a long way in saving future headaches.
Set up automated payments or reminders: setting up automated payments, or at the very least automated reminders, is one of the best ways you can avoid late payments.

Missing a credit card payment and doing nothing about it is never a good choice. Lending institutions are usually willing to work with you if you admit to the mistake, so don't let the problem fester. Approach it head on and save your credit score from needless damage.

What Are My Options if I Get Declined for a Credit Builder Card?

Getting declined for a credit builder card may leave you feeling dejected and hopeless. If you don't know where to turn, don't fret. There are still options! Here are some other credit builder products and services that can help you climb out of debt and repair your credit.

Guarantor loans: a guarantor loan allows you to borrow money, but you and a guarantor are on the hook for paying it back. These types of loans are great if you have a documented history of being unable to pay back loans because it tells the lender that even if you are unable to do so, somebody else will cover it. Realistically the lender doesn't care where the money comes from, they just want it. The trickiest part of taking out a guarantor loan is...well, finding a guarantor. Keep in mind that these loans usually have extremely high interest rates.
Utilize financial apps: the modern age of the internet has brought on new credit building apps that can help with financial planning on a month-to-month basis, thereby improving your credit score over time. Pave could help you to build your credit score with all three major credit bureaus: Experian, Equifax, and TransUnion; and it only takes three minutes to sign up! For more credit builder tools click here.
Prepaid credit builder cards: these function similar to a debit card. You preload a finite amount of money onto it and are free to spend it however you please. These cards usually have tacked-on monthly fees to use and can come with extra charges if you want to withdraw cash at ATMs or make money transfers.
Credit builder loans: in the past, we've talked extensively about credit builder loans. Here's how they work: the lender puts money you agreed to borrow into a lender-held bank account. This is an account you cannot access until you have repaid the loan and any interest charged.

Build your credit score to get more financial options

72% of UK adults don’t think everyone in Britain has a fair chance to go as far as their talent and hard work will take them. Our current financial system doesn’t give everyone a fair chance. It pushes people who are working on improving their financial lives into more debt, rather than offering them a way out. This leaves an estimated 15 million people financially undervalued by our system, possibly for their whole lives.

Our mission at Pave is to eliminate financial inequality and give people a fair chance to go as far as they can. We do this by offering the proper path to good credit.