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Should I Use One of Those Credit Builder Cards to Boost My Score?

Should I Use One of Those Credit Builder Cards to Boost My Score?

There are many ways to build on one’s credit score. Whether it is piggybacking on some other person’s card as an authorised user or something as simple as making your payments on time. The number of ways you can get your credit score up to the 650-750 range are quite numerous.

One of the earlier methods offered to any credit owner is the credit builder. The question is does this really work in helping you improve your score? The short answer is yes but you need to understand a few things about this type of credit first to make the most out of it.

What’s a Credit Builder Card?

Also known as credit cards for no credit or bad credit, credit builder cards are designed to help people improve on their credit score considerably. The way it works is actually quite simple: when a credit card issuer offers you a builder card, it will function similar to a typical credit card which means that you can use it for purchases, subscribe it to automatic payments, and other typical transactions.

However, there is a twist: Before you can even activate the most basic of functions of the credit builder card, you’d have to pay incrementally it’s deposit. In some cases, it will take you to a full year of constant timely payments per month before you can even use the credit builder for whatever purpose you have in mind for it.

On the flip side, that’s exactly the point. Credit card issuers, before giving you a considerable amount of money to loan, would want to test first if you are actually that reliable in keeping up with your financial obligations. If you’re just starting and have no credit score yet, it’s hard for credit card companies to gauge your creditworthiness.

On the other hand, they would also want to know if you have the ability to change especially if you had received a drop in your score. After all, you’re still a potential client i.e. someone they can draw income from. A credit builder score can help both you and the creditor establish a relationship despite your poor credit score.

Who is a Credit Builder Card Designed For?

As was stated, credit builders are ideal for those people who find it difficult to apply for the usual types of credit. Your reasons for applying for one would be different from another applicant but the credit builder card is often great for people who:

  • Have no history or borrowing loans or are new to the entire system
  • Had problems dealing with debt in the past
  • Had a business or businesses that previously went bankrupt
  • Had a judgement rendered against you in both civil and criminal courts, preferably for money-related incidents

Keep in mind, however, that a credit builder card is not your ticket way out of any of the problems. The credit builder card only works to your favour if it can help you develop some sound financial management skills.

The Downsides

Although it might look like an easy and effective credit building strategy, there are problems that you will encounter when it comes to credit builders. For starters, the interest rate is incredibly high on these cards compared to other cards especially from the start. The credit card company would really want to test your reliability when it comes to a loan and they do this through giving some sense of urgency to your monthly payments through high interest.

Next, for a credit card, a credit builder has a fairly small credit limit. This is because it was designed as a credit booster first and an actual credit card second. Simply put, you can’t really use the credit builder for any major transaction. At most, a credit builder can allow you to spend as much as £1,000 approximately before maxing out.

However, these drawbacks are temporary most of the time. In time and with consistency in your monthly payments, you should be able to qualify yourself for a reduction in the interest rate as well as a higher credit limit.

The Upside

The credit builder can actually help you on two fronts. The most direct benefit is that it can help you build on your credit reputation. The way it does this is the fact that every payment you make to activate the builder’s basic features will be reported by the creditor to the reporting agency who would then include it as an entry to your credit history’s list of payments.

In a few months, your credit score should get a considerable boost by 50-200 points depending on how timely you were in making the payment. You might not exactly hit the 700+ range but, at the very least, you should be able to reach the 600-650 range with at least a year’s worth of payments.

The next benefit is a more psychological one. The credit builder’s concept forces you to develop good spending habits by practically forcing you to deal with an obligation before you can even enjoy the benefits. Eventually, you’d develop a habit of dealing with your financial obligations on time.

Going Prepaid

There are some credit cards out there that have a quasi credit builder function as well. Some prepaid cards, those credit cards that you have to deposit money on to use them, offer a quasi credit builder function. Basically, the creditor loans you with a year’s worth of credits which are payable in a 12-month period. An added benefit here is that the payments are usually free of any interest.

Just like the credit builder, the payments you make for the credit builder prepaid card will be reported to the agency and entered into your payment history. However, the boost here is significantly larger as your payment will be registered as a single entry in it’s entirety. This means that if you were that timely with your payment, your credit score can receive a tremendous boost by at least 200 points. This depends on how the creditor actually reports to the agency your payments but it’s safe to say that you can help improve on your credit score without getting into further debt and for manageable interests.

Choosing a Credit Builder Card

Credit builder cards are great tools to improve on your credit score but, as with all things, you need to make the best possible decision when choosing one. Here are a few tips to help you do so.

1. Don’t Make Multiple Applications

Credit builder cards are still credit cards by nature. This means that applying for one gets you hit with a hard search as the company would want to pull up your credit history to see if you qualify for the loan. A single hard search will not really affect your credit score but multiple searches done in a span of a short period will.

If possible, keep your application down to 1. Your goal here is to gradually build on your credit score, after all, not put yourself into potentially tight financial situations or cause someone to intentionally put a small dent on your already low score.

2. Make Sure You’re Eligible in the First Place

One way to prevent a hard search into your credit history is to use an eligibility checker. These programs will help you see what kind of credit builder loans you are actually allowed to apply for as well as chances of your success if you do decide to apply for it. With a checker, you can weigh in on the pros and cons for each credit builder card available for you before you even contact the credit card company.

3. Mind the Interest Rates

The interest rates for credit builders are comparatively high but that does not mean that you have no room for negotiations here. Creditors have their own interest rates for builders and wouldn’t mind if you inquire about them. The goal you have to have in mind is to look for a credit builder whose interest rates you can manage right from the start.

4. Don’t Forget the Benefits

Creditors also have their set of perks offered for credit builder applicants. Things like 24/7 live support, credit score tracking, and even app-centric banking services can help enhance your experience with the credit card company. Regardless of what advantages the creditor offers, always look for the card that will prioritise your credit-building goals.

In Conclusion

As a typical credit card, a credit builder does not have much to offer you right from the get-go. However, as a credit-building strategy, it has more than enough perks that can help you manage your spending habits while also improving your overall credit score.

The key to successfully using it, then, lies in your lifestyle. Developing habits that allow you to save more while also dealing with any obligation you might incur will give that creditor a reason to trust you more. If they think that you are that reliable with money, their reports to the credit agency will definitely be more favourable to you, leading to a considerably better credit score.

Have you tried using credit builders before? What tips have you used to maximize its benefits? Let us know in the comments section down below.