Used the right way, a credit builder card can benefit those working to improve their credit scores. But used in less advantageous ways, a credit builder card can be very expensive indeed. We'll explain how best to use a credit builder card, to help you improve your credit rating and avoid sinking deeper into debt.
How to Use a Credit Builder Card
To get the most of out a credit builder card, use it help improve your credit rating. This can be accomplished by demonstrating good management of your finances—always paying on time and staying under your credit limit. Making small purchases, then paying them off quickly, shows you're reliable at paying back your debts.
How Best to Use a Credit Builder Card
- Pay off the entire balance each month
- Pay on time
- Stay under the credit limit
Here are links to reviews we've written on some credit builder cards that can be used in this way:
How Not to Use a Credit Builder Card
Generally speaking, don't rely on a credit builder card to borrow money. That is, don't carry a balance from month to month on a credit builder card, as you'll consequently owe interest at a significant rate. To every extent possible, pay down your full balance each month (on time).
How Not to Use a Credit Builder Card
- Do not pay only the minimum monthly payment (pay more to reduce/avoid potentially high interest charges)
- Do not carry a balance over from month to month
- Do not pay late
- Do not exceed the credit limit
Credit cards are generally an expensive form of debt—even more so for credit builder cards that charge higher than average interest rates. According to our latest check of the market, the average credit builder representative APR in the UK is around 35%, nearly 2X the average interest rate on cards for excellent credit.
Paying only the minimum payment is quite costly, as you'll pay £2.4 in interest for every £1 originally borrowed on average.
Not only are interest charges potentially high on a credit builder card if you don't pay your full balance each month, but the time to become debt free is significant the more you borrow. Since a larger portion of each payment goes towards interest charges when you borrow on a credit builder card, there's less money left to pay down your balance, extending the time to repay.
|Min pay||Total Interest Charges||Months to Pay Off||Interest as % of Original Debt|
|Minimum Monthly Payment||£2,471||244||247.1%|
To make matters worse, only 51% of cardholders need to receive the stated APR of a credit card—the other 49% can, and usually do, pay a higher interest rate. And if you carry any balance from month to month, you'll owe interest at these higher rates.
To recap, a credit builder card can be of great benefit to those with bad credit when used to make small purchases that you pay off in full each month—the card can provide credit you may not otherwise find available and the chance to improve your credit score. On the other hand, when used to borrow money from month to month, a credit builder card can add to your financial troubles because you'll be on the hook for potentially high interest charges.
A credit builder card is designed to provide credit to people with weaker credit scores. Credit builder cards might offer credit to people who find their applications aren't accepted by 'regular' credit cards. Credit builder cards usually charge noticeably higher interest rates on borrowed money, sometime 2X as much or even more. The APR on a credit builder card is typically in the region of 33% to 53%.
It depends. We would say they're not worth carrying a balance on from month to month if you can help it, as the interest rates charged on a credit builder card are higher (in some cases, quite high indeed).
While there's no guarantee, if used correctly a credit builder card should serve to improve the cardholder's credit rating. This means paying on time, staying under the credit limit and, ideally, paying the full balance each month (avoids expensive interest charges).
Credit builder cards work by giving people the opportunity to demonstrate they can handle debt responsibly. By making charges to the card and then paying those amounts back on time, and by staying under the maximum amount that can be borrowed, a borrower can show they are on top of their finances and not stretched.