This is a guest post from Louise Tillotson:
Get a credit card to repair a bad credit file – sounds like an oxymoron, doesn’t it? Most people think that the best thing to do if you have a bad credit history is simply to avoid all possible forms of credit like the plague – and I’m not here to say any different. This technique does work, and there’s nothing wrong with it. But if you want to take an active role in improving your credit score, rather than simply waiting for the bad stuff to disappear from your file, then there are other things you can do.
Previously, anyone with adverse entries such as defaults, CCJs or IVAs on their credit report found it nearly impossible to get a credit card. This got worse as the economy tightened, and now even people with a few missed payments on their files are finding themselves tarred with the same brush. And if they have no previous credit, then getting that first card is almost an exercise in futility as banks don’t want to take the risk of lending to an ‘unknown’.
But credit cards do exist which will actually help people to either build or repair their credit rating. These are called, respectively, credit builder and bad credit credit cards. Although the two are essentially similar, there are differences in the lending criteria.
The former, credit builder credit cards, are specifically designed for people aged 18 or over who have never had any form of credit in their name before. The lending bank has no idea how a person will manage their money as there are no precedents, so the APR on these cards can be rather high to reflect the risk. Approval is based on current financial circumstances and an estimate of how the person could manage their money.
Bad credit credit cards are targeted towards people who have had financial difficulties in the past, resulting in missed payments, defaults or CCJs being placed on their reports. While standard card lenders look at the past 6 years of a financial record when considering an application, lenders for ‘bad credit’ cards will also take into account the current circumstances: if the applicant’s salary has recently increased, or they have cleared off a lot of existing debt, then this will all count in their favor.
Both types of credit card carry higher than average interest rates, and they’re unlikely to have any 0% interest periods, so these cards aren’t designed for a high volume of spending. They can be thought of as a tool for demonstrating to future lenders that the owner can manage their finances and make timely repayments.
With all credit cards, it’s best to pay off your balance in full each month if you can. This will not only look good on your credit file, but you could also avoid paying the interest which, on the cards detailed above, can be as high as 39.9% APR.
Louise has worked in the financial sector for many years. She currently works as a writer for Moneysupermarket, and writes financial articles for a number of other sites as well.