A good credit score will open up many avenues, including better borrowing offers, lower interest rates, and even money saved on your home and car insurance. While a dip in your credit score isn’t ideal, it is possible to rebuild it with the help of a credit building account. Borrowers with a negative credit history who are unlikely to have their applications accepted for other kinds of credit are encouraged to apply for these purpose-built credit building accounts, that are aimed at those looking to improve their credit score and get back on track with their finances.
When it comes to choosing the right credit builder for you, it’s important to know what to look for. Here are three things you’ll want to consider when weighing up your options.
A lower-end interest rate
Credit builder cards tend to come with low credit limits and high annual percentage rates (APRs). This is because they’re primarily aimed at borrowers with low creditworthiness, who either have a low overall score or a limited credit history. To lenders, this flags them as more risky borrowers, and a high APR is necessary to protect the lender’s interests as a result.
While you’re unlikely to find a credit builder account with an APR as low as an everyday credit account, it is important to note that there will be some deals that are better than others. High interest rates aren’t ideal if you’re trying to get back on your feet financially, so it’s best to seek an account at the lower end of the scale when shopping around for the best deal.
A reasonable credit limit
Similarly, you don’t want to immediately settle for an account that’s offering an exceptionally low credit limit – or one that’s far too high. While you do need to make use of your credit in order to build your score, experts recommend that you only utilise up to 30% of it overall in order to build and maintain a healthy credit score.
The lower your credit limit, the less of it you can use before you hit that 30% mark. But, if your credit limit is too high, you may be tempted to spend more than you can afford. It’s important to take this into account, and choose a credit builder with a limit that feels reasonable in relation to your income and spending habits.
Cashback and rewards
While somewhat uncommon, it is possible to find credit builder accounts that offer rewards, such as cashback and credit limit increases after a certain period of responsible borrowing. It’s important to note that any potential rewards should only affect your decision after the APR and starting credit limit of the account has been considered – these are the two factors that will help you to build your credit score, and ultimately, any rewards simply aren’t worth it if you’re not seeing any growth or are paying too much interest.
Focus on your credit building goal
It’s important to always keep your financial goal in mind once you have access to your credit building account. Having new funds available to you can feel exciting, but the purpose of this account is to spend mindfully and sparingly, making regular repayments each month and ultimately building your credit score as a result. The good thing is, once you’ve gotten started, your credit score should swiftly improve as long as you use your account responsibly.
