“I know that this is a topic that is almost over explored. It’s also a topic that we can find on the Loqbox blog. But I am still not sure how to maximise the benefits of having a credit card. I used a credit-builder credit card for almost 2 years, but my credit score did not improve significantly.
Because of this, I’m worried I’m doing something wrong. Could you elaborate on the way customers should behave? I mean, we all know that paying in full every month means that we won’t be charged any interest, but when exactly should we clear our balance? Let’s say that the balance closes on the 6th of every month, should we clear it before the end of the month so 30th/31st or after the statement so 6th/7th? Is it better to clear 100% of balance or maybe 99%, as I saw somewhere?”
– Loqbox customer
What is a credit-builder credit card and why would you use one?
If you’re just joining the conversation, here’s the lowdown on credit-builder credit cards… If you’re ready to explore tips for using one, feel free to skip ahead.
Credit-builder credit cards are specifically designed for people with little to no credit history as a way to improve their credit scores. Why do people need to improve their credit scores? Lenders use your credit score to assess how much of a risk it is to lend money to you. So if you are planning to apply for credit, whether that’s for a mortgage to buy your first home or car finance, you will need a good credit score to demonstrate to lenders that it’s safe to lend to you.
Further, with lenders, how good your credit score is not only impacts whether your application for credit will be accepted or not; but also how expensive the cost of that credit will be for you to repay. This is because if you have a lower credit score, you are considered to be higher risk, and therefore you may be offered credit deals with higher interest rates (making borrowing money more expensive for you) than someone with a good credit score. Other organisations who might check your credit history include (but are not limited to): Employers as part of their pre-employment screening; landlords ahead of agreeing a lease when renting and mobile phone companies ahead of issuing a contract phone. Therefore your credit score can impact a number of things from being able to get on the property ladder, to being able to get a mobile phone.
What a lot of people don’t realise is that their credit score can be low even if they’re generally good with managing their money. Why? If you’ve never taken out a credit agreement, or had any bills in your name, then there won’t have been any occasion for credit reference agencies to track how good you are at making payments. Therefore how you handle credit is an unknown, and lenders will see this as high risk.
How does a credit-builder credit card help? By taking out a credit card you are making an agreement with the credit card issuer that you’ll make the minimum payment by the expected due date. When you honour that agreement by making a payment on time, the credit card issuer reports to the credit reference agencies that you have successfully made that payment. Repeatedly making the payments on time gives you the opportunity to demonstrate that you are good with managing credit and as a result your credit score will likely go up.
Which credit-builder credit card do you recommend?
Fun fact — according to MoneySuperMarket, credit-builder credit cards are the most popular type of credit card for people ages 18 to 25.
Here are some useful links for you if you’re shopping for a new credit-builder credit card:
Credit card basics: four tips for using a credit-building credit card
To return to the original question, once you have a credit-builder credit card, what’s the most effective way to use it to build your credit score? Here are four of your top questions answered.
1. Timing: when should I pay my balance?
We know late payments result in a whole load of unwanted consequences. It can negatively impact your credit score for one, and it can also be really costly as your interest rate may be increased to the highest penalty rate as a result which makes it even harder to pay. Clearly this is best avoided if possible.
So we know when the worst time is, but when is the best time to pay off the balance?
As with many other things in life, timing is everything. You should be aiming to pay off your credit card in full every month — that way you will avoid having to pay interest which can be really high on credit-builder cards. There are three times in the cycle that are generally considered optimum times to make a payment. (And the exact dates of these will depend on your billing cycle, see your credit card statement for more information.) They are:
- Before the due date
- Before the account statement closing date
- Right after payday
Before the due date
The first one I’m going to discuss is an obvious one – but as it’s extremely important, yes I am going to remind you, and please forgive me. Usually, you’ll have 21 days from the account statement closing date (the last day of your billing period) before the date that payment is due. Making the minimum payment on time (by this date) prevents you incurring penalty rates and creates a positive payment record on your credit history which can contribute towards improving your credit score. Even making a payment just a few minutes late can incur unwanted charges so try to stay ahead of the game with this and be on time.
Before the account statement closing date
Your credit card transactions are billed to you in periods of time known as billing cycles. The last day of the billing cycle is your account statement closing date. This is not the same as the payment due date. On the account statement closing date, most credit card issuers report key information relating to your account statements to the credit reference agencies (CRAs). This includes the account status, balance, credit limit, and most recent payment amount.
By reviewing all sources of credit available to you, the CRAs use the account balances and credit limits to calculate what percentage of your overall available credit is currently being used. This is your credit utilisation rate. For example, if you have only one source of credit, let’s say a credit card, with a limit of £1,000 and your closing account statement says the balance on your card is £100, your credit utilisation rate is 10%. A high credit utilisation rate negatively affects your credit score because the CRAs consider your needing to use credit as a sign of being in financial difficulty.
According to the credit reference agency Equifax, ‘if you use between 50% – 75% of your credit limit, this will show up as an ‘amber flag’ on your credit report, meaning it may have an effect on your credit score. If you are using more than 75% of your credit limit, this will be a ‘red flag’ on your credit report, and it’s likely to have a negative effect on your credit score.’
This creates a complexity for people wanting to use their credit card to build their credit scores as they need to be using it to make payments to build their credit history, but without having a high utilisation rate. The answer is to make a payment to pay off your credit card in full before the account statement closing date. This means that a lower utilisation rate will be reported to the CRAs. And this can help build your credit score.
Not sure when your account statement closing date is? Check out your credit card statement, all the information should be there.
Right after payday
This one is more to help you manage your money than to outwit the credit card issuers and their interest rates, or to present yourself in the best light to credit reference agencies. By making your payment just after you’ve been paid you’re putting yourself in the strongest position to be able to afford the payment because that’s when the money is in your account. If you’re paying off the card in full just be sure that you will have enough money left for the rest of the month.
2. What kind of purchases should I put on my card?
The first thing to say here is: Definitely not cash. Do not make cash withdrawals on a credit-builder credit card. Right, now that’s out the way, you should only be using the credit card to pay for things that you would have bought anyway.
Having a credit card is not supposed to encourage you to spend more money than you would normally. Your goal is to build your credit score, and the credit card enables this by reporting on your ability to manage credit to the credit reference agencies.
That’s why it’s a good idea to use it for things like your weekly food shop, or to link it to your Amazon account. In this case you would have bought these things anyway, you are just using a different card. And you can transfer the money for these purchases from the account you’d normally use as soon after the transaction as you like. You can even do it immediately if you’re worried about it.
3. How long does it take to see an impact?
Your credit card issuer will report to the credit reference agencies (CRAs) on a monthly basis. And from here it can take the CRAs up to one month from receiving that update for it to be reflected on your credit report. That’s why building your credit score can take a little time so be patient.
4. Is a credit-building credit card the only way I can improve my credit score?
Many people may not want to get a credit card, and others may not be able to. Further you may already have a credit-builder credit card and be looking for further ways to improve your credit score. Well the good news is credit-builder credit cards are just one of the tools you can use.
For those looking for something else, take a look at Loqbox. Loqbox is a clever way to build your credit score without using a credit card — or as well as. It’s also free. What’s not to like? To find out more about Loqbox and how it can help you build your credit score check out how it works here.
That’s all for now folks. If you’re interested in exploring more ways to improve your credit score and build your financial fitness then be sure to visit our blog and social media pages where we frequently post fresh content to help you achieve your goals.