If you don’t have any credit history or are looking to rebuild your credit report, then specialist credit cards could help.
Want to get a mortgage, credit card, loan or other form of borrowing? A healthy credit report can be the difference between acceptance and rejection, a good rate or a bad rate.
There are plenty of things you can do to strengthen your credit file – registering to vote through, paying bills on time checking your report for errors and having a bank account all help. And alongside these is to spend on a credit card.
That might seem counter-intuitive. Using a credit card is to spend money that isn’t yours. If you don’t need to borrow then surely it’s better to not have a card?
Well, what you’re doing by using a card showing you are a responsible borrower. That you can be given credit and pay it back.
Here’s more on how this helps your credit report and how to find the best credit building cards.
Watch my video looking at the best first-time credit cards for beginners
Using credit cards to boost your credit file
There are some key rules you need to follow to make sure spending on a credit card helps rather than hurts your credit report.
Use them only for everyday spending
A very simple one to start. Having a credit card shouldn’t encourage you to buy things you wouldn’t normally be able to afford.
Instead use it only for everyday spending. I often suggest something like supermarket shopping or filling up on petrol.
This way you’re just swapping spending on your debit card for spending on your credit card.
It helps to avoid temptation if you only take it with you when you are going to make that regular purchase, and leave it at home the rest of the time.
Clear the card every month
It’s vital that you remember to pay off the card in full. This shows you are responsible and can pay back what your borrow. Big tick for that credit report.
But it also means you’ll avoid getting charged interest. Credit cards have high interest rates, generally starting at 19% and going above 50%. This is added on each month to any money not cleared.
If you can’t afford to do this, then you must make at least the minimum repayment. This varies and is set by the card provider. Fail to do this and you’ll be hit by charges and it’ll be shown on your credit file – going against the good work your doing to improve your credit score.
Watch out for spending the money twice
Though you’ll be spending on things you’d normally buy, that money doesn’t leave your current account until your pay off the card.
There’s the risk that you’ll see the extra cash in your bank account and forget you need it to clear the card. So you spend it elsewhere.
If you are worried about this you can actually transfer the money across straight away rather than wait for the direct debit. If you do this I’d still have the automated payment set up just incase you forget.
Try not to use more than 30% of your credit limit
Lenders often look at something called “credit utilisation”. This is how much of your available credit you use.
Though it’ll be different for every credit card company, a good rule of thumb is to keep that level below 30%. The closer you are to this level each month the better it reflects on your overall report.
So if you have a £500 credit limit you don’t want to owe more than £150 on that card.
Focus on credit building
There are a number of other reasons credit cards can be useful – extra consumer protection, cashback and rewards, 0% spending and cutting the cost of debts. But I’d try to not get distracted.
Keep it simple by just spending and repaying, spending and repaying, and so on, month after month.
Applying for credit building credit cards
Some get caught in the vicious circle of not having enough of a credit history to get accepted for a credit card, but needing a credit card to help improve their report in order to get one. And every rejection makes it harder still to get another card.
So how do you avoid this?
Check your eligibility
Many credit card providers will let you undertake a ‘soft’ eligibility check before a full ‘hard’ application. Do this and you’ll know whether you’ll get the card or not, or at least see your chances of acceptance.
Personally, unless there’s a very specific card you are after, I’d go via a comparison site such as Money Saving Expert’s Credit Club. This will show you your chances against a range of different cards. You can then pick the card with the highest chance of acceptance.
Here’s more on how these checks work.
Look at specialist credit building credit cards
Though any spending and repaying on any credit card will help you improve your credit report, if you’re starting from scratch or have had problems with credit in the past you’ll probably want to look at a specific credit building card.
These are easier to get, but often come with restrictions. The interest rate for a start is likely to be higher than you’ll see on other cards. But this shouldn’t be an issue if you are clearing the balance completely each month.
You’ll also probably get a relatively low credit limit. But that is no bad thing either as it prevents you spending too much on the cards.
Watch out for representative APR
Though I’d encourage you to not get a credit card if you think you’re going to pay the interest charges, it makes sense to be aware of what you could be charged just in case.
Sadly it’s not as easy as just picking the card with the lowest rate as only 51% of successful applicants need to be offered the advertised rate – meaning 49% could pay more, sometimes a lot more.
Best first-time credit cards
These cards are worth considering as your first credit cards to help boost your credit report.
Amazon Classic Credit Card
- £10 Amazon voucher if successful
- £500 credit limit
- 29.9% APR
- 0% interest for three months
- CHECK ELIGIBILITY AT AMAZON
The key bonus here is a £10 Amazon voucher if you are accepted. If you make regular repayments over 12 months then you’ll get upgraded to the Amazon Platinum card which offers reward points on purchases.
Tesco Bank Foundation Credit Card
- 1 bonus Clubcard point for every £4 spent at Tesco
- 1 bonus Clubcard point for every £8 spent elsewhere
- £200 to £1,500 credit limit
- 27.5% APR
- More on the card (you’ll need to check eligibility via a comparison site)
This card offers money back when you spend – but don’t get too excited. You’d need to spend £100 a month for a year outside of Tesco to even make £1.50 – and that’s only if you are spending full multiples of £8 each time.
Barclaycard Forward Credit Card
- £50 to £1,200 credit limit
- 33.9% APR
- 0% interest for three months
- CHECK ELIGIBILITY AT BARCLAYCARD
If you think you will have to pay interest then this will drop by 3% after year one and another 2% after year two if you make all your payments on time and stay within your credit limit. Of course, you might be able to get a lower rate straight off from another card.