If you have a bad credit rating or, have yet to accrue a credit history, you might want to consider applying for a 'credit-builder' credit card.
As the name hints, using one of these type of credit card will, over time, help you to repair your credit rating. Then eventually, your credit history will have improved to the point where you can be approved more credit, and at better rates.
Sounds great, how does it work?
Credit-builder cards are specifically targeted towards those with a poor credit rating, but obviously there's a catch. The catch is that the interest rate (APR) is much higher, - much, much higher in fact. It's fair to say that a poor credit history increases the risk on non-repayment, and as such interest rates should be higher, but credit-builder cards charge APR in the region of up to four times that of a regular credit card. APR can vary greatly between cards, but normally you'd expect it to sit around 15% - 25% for a 'normal' card. Credit-builder cards, on the other hand, can reach APR rates of up to 60%! To put that into context for you a loan against the card of £1000 for a year, would cost you around £350 in interest.
With this in mind it's easy to be dismissive of credit-builder cards, but they do have applicable uses when used appropriately and with discipline.
Practical Uses for Credit-builder cards
First of all you should note that using a credit-builder card isn't going to do anything for your credit score if you are unable to make the payments on time. We'd strongly recommend setting up a direct debit for the minimum set payment amount, to ensure that you don't face any financial penalties -or further blemishes to you credit record. Of course, if you have more than the minimum amount available to pay off, you'll be more than welcome to do so with an additional payment, and this will help to keep the interest you pay to a minimum.
The best method of use is for everyday shopping such as groceries. Any purchases made should be interest free for 30 days, so you can do your weekly shopping on your card, stow away the money you would have spent – then use that money to completely clear off the balance at the end of the month. Don't be tempted to pay off only some of the balance as the astronomical interest rates are bound to land you in trouble further down the line. Also don't draw cash out on the card; the interest is much higher than with card terminal purchases.
Rinse and Repeat
After about 6 months of doing this, it'll be worth rechecking your credit report. Assuming you've had no hiccups along the way, your credit history should have improved to the point where you can now access better credit card deals. And as a result you can switch to a better lender, repeat the process and improve your credit score even more.