To get a good credit card, you need a good credit history. Here's how to build -- or rebuild -- yours.
Do you remember when getting credit was as easy as taking candy from a baby? In pre-credit crunch times, banks seemed to dole it out like sweets.
But it has never been quite that simple for borrowers with credit problems or without a credit history. And with lending criteria getting tighter, it looks set to get even more difficult.
Nowadays, the most competitive credit cards are usually reserved for people with excellent credit ratings. If your credit score doesn't measure up, don't be surprised if you get turned down if you apply for a top credit card.
But that doesn't mean you can't get credit full-stop. If you think market-leading cards are beyond your reach, you could consider applying for one that is specifically targeted at borrowers with less than perfect credit histories.
What is a less than perfect credit history?
This doesn't necessarily mean you're a bad borrower. A low credit score will, of course, be triggered by credit problems, but it could be caused by any one of the following reasons:
- You have had little credit so far. Perhaps you have an overdraft but no credit cards, credit agreements or personal loans.
- You have never had any credit before.
- You're a student and you don't have a regular income. (You could apply for a credit card that is specifically aimed at people in higher education. The Barclaycard Student Credit Card is a good example.)
- You have recently moved to the UK or returned to the UK having lived abroad
- You have a low income. Perhaps you work part-time or you're retired.
- You're self-employed and you find it difficult to prove a regular income.
If you have little or no credit already, the chances are most credit card companies will reject you. That's simply because they can't assess whether you're creditworthy. Since there's no real track record of how good you are at keeping on top of your debt commitments, you're considered a higher risk.
There's such a high demand for credit these days, card companies can afford to cherry pick the best applicants. So those of you with a low credit score may find it difficult to get accepted for a mainstream credit card.
But what can you do about it?
Before you even think about the alternatives, check out your credit report* first to get a better idea of how your credit history really looks. There's a chance it may not be as bad as you think.
But if your worst fears are confirmed, don't panic. Consider this selection of cards for people who want to strengthen their credit history.
Remember, you should only apply for a so-called 'high risk' credit card if you really have to. Don't repeatedly go for mainstream cards, only to get turned down time and time again. Numerous rejected applications will put even more black marks on your credit report.
Credit Cards For Borrowers With Low Credit Ratings
Card | Typical APR | Initial Credit Limits | Suitable for you if you have... |
|---|
Aqua Mastercard
|
35.9%
|
Up to £2,200
|
Credit problems or no credit history
|
Barclaycard Initial |
27.9%
|
£250 - £2,000
|
No CCJs but you want to strengthen your credit history. Not for students
|
Capital One Classic
|
34.9%
|
Up to £2,500
|
Credit problems or no credit history
|
Vanquis Visa
|
39.9%
|
£250 - £1,000
|
Credit problems or no credit history
|
The first thing you may notice is the horrendously high APRs. True, these cards don't seem attractive on the surface, but they can serve an important purpose if you use them properly.
The idea is you spend a little on the card every month and then make absolutely sure you keep within your credit limit and repay your balance in full every single month. That way you'll escape the ridiculously high interest rate.
Once you have around a year's good behaviour behind you, this will help to repair your tarnished credit history -- even if you have defaulted on credit repayments in the past. And if you're new to credit, by following this pattern, you'll gradually build up a good credit history.
That should be sufficient to enable you to apply for standard credit cards such as the Halifax All In One Mastercard or the Virgin Money Credit Card and stand a better chance of being accepted. You could then enjoy benefits such as 0% balance transfers and interest-free spending.
So, on a final note, it's important you don't think of these 'high-risk' credit cards as a way to borrow money, but instead as a Foolish way of improving your credit rating.
* You could buy a report from Equifax Credit Rating for £14.95, or you can sign up for a 30-free trial with Experian through The Fool. This will give you access to your report for free of charge. If you don't want to pay a monthly subscription, remember to cancel before the trial is over.
More: This Mistake Could Cost You Thousands | How To Improve Your Credit Rating | Find the right card for you at The Motley Fool Credit Card Centre.
