Credit Building > All you need to know about credit cards to build credit

All you need to know about credit cards to build credit

Wollit Team5 minute read · Updated 29th June 2024

Credit building credit cards can be a tool to improve your credit score. These cards can see you getting your credit back on track if you’ve experienced any difficulties, perhaps been refused credit elsewhere or if you’re just starting out with building your credit file.

We’d like to take some time to show you just how credit cards can benefit you, some of the dangers that exist, and to show you an alternative too. If you’re looking for ways to improve your credit score, then read on.

What are credit building credit cards?

As the name suggests, credit building credit cards are credit cards that help you to build credit. The main differences that you will see between credit building credit cards and a standard credit are:

Lower credit limits
Higher APR (Annual Percentage Rate)
A lack of any rewards
No promotional offers such as 0% balance transfers

The reason that these credit card companies charge higher interest and offer lower limits is that they are looking to mitigate their risk. If you have a low credit score, or no credit history at all, the credit card company is taking a risk by lending you money. They do what they can to minimise this. If you manage the credit card well, companies often choose to increase your credit limit in due time, which can also help you increase your credit score.

How can credit building credit cards help you to build credit?

The truth is, when you first get accepted for credit building credit cards, you will probably see that your credit score dips. Don’t be alarmed! This is quite normal and often happens when people take out a new form of credit. It even happens when people open a new bank account. The reason that this dip happens is that lenders don’t know why you’ve taken out extra credit. They see you applying for new credit and the assumption is that you are in financial difficulty. The dip is temporary and what happens next is completely under your control.

By managing your new credit card responsibly, you will see that your credit score starts to move in the other direction. This is because the credit card is giving you the opportunity to show lenders how you manage your money. If you do everything right, your score should dip and climb back up within the first 3 months. Miss repayments, exceed your limit or be late paying and you will see your credit score take a dive. Stick to what you are supposed to do and you will see the rewards.

Are there any risks with credit building credit cards?

While credit building credit cards bring some great benefits, there are also a few risk factors that you should be aware of. Here are some of the top ones to consider:

Running into debt

To make the most of these credit cards you need to be disciplined. If you keep your credit utilisation rate low and pay off all your balance every month you’ll do just fine. If, however, you start to use your card for treats, non-essentials, and things that you don’t usually have the money for, you run the risk of finding yourself stuck in debt. It is the temptation to spend with a credit card that present a real risk. It is too easy to think that you’ll just use this now and then pay it off later. What tends to happen is that your balance grows and grows and then you realise even your salary can’t help to pay it off in full. You’ll be left with only being able to afford the minimum payment each month, rake up interest and risk becoming trapped by your debt.

High interest

Running into debt then leads to you being charged interest on your balance. The idea is that your balance is cleared in full every month to avoid this. As soon as your balance starts to roll over you will start to see the interest mount, leading you even further into debt. This is where credit cards differ significantly from loans. With a personal loan, you are borrowing a set amount, with a set interest rate, over a set term. You always know what you are needing to pay to clear your debt. With credit cards, it is hard to keep track of exactly what interest charges you are paying. It is often the case that people end up having to repay much more than they originally thought.

Monitoring utilisation rates

If you lose track of your utilisation rate you may find that you cause harm to your credit score. It is not always easy monitoring percentages while you are dealing with so many other things, but any little slip-ups will see your credit score take an immediate tumble.

Understanding credit utilisation rates and why they matter

When we recommend using your credit card for recurring subscriptions, there is a good reason for this. The benefits of doing this are that your credit utilisation stays low. Credit utilisation looks at how much of your available credit you are using. Lenders get a little nervous when they see someone has maxed out every line of credit that they have. Why? It suggests that someone is either in financial difficultly or poor at managing their finances.

It has been suggested that you should be using under 30% of the credit that is available to you. This shows that you are in a good place and that you are managing your finances well. The best place to be is using between 2%-5% and repaying this at the end of each month. Using your credit card to pay subscriptions such as Netflix and Spotify is the ideal way to achieve this.

How can I get a credit building credit card?

When it comes to applying for a credit building credit card, the first steps that you take are ones that will protect your current credit score. Although these cards are designed for people with either no credit or poor credit, there is no guarantee of being accepted. If you apply to one company and get turned down, you will cause damage to your credit file as it records hard credit check as an each application. The more applications you have for credit, the more desperate you come across. If lenders see numerous applications in a short space of time it suggests to them that you are in trouble. That is why it is important to do your research about the card before you apply for it.

How to use credit building credit cards

It may seem obvious, but to get the best out of credit building credit cards, you’re going to need to use the credit and repay it each month. Here are our top tips for using your new card effectively:

Be sure to pay off your balance in full every month so that you avoid interest
Don’t be late paying - this will see you incurring fees and your credit score taking a dive
If you can’t pay off your entire balance, at least pay the minimum amount
Use a direct debit to pay so that you don’t need to remember each month
See if you can receive text or email alerts before your next statement is due

It is likely that your first card will see you being given a limit of a few hundred pounds. If you only use this for things that you are already paying for, there is no chance of your falling into debt. If you decide to use your newfound flexible friend for treats then you are then going to need to find additional funds every month to clear the balance. Some of the best things to use credit building credit cards for are:

Fuel for your car as you would already be paying this every month
Recurring subscriptions such as Netflix and Spotify
Grocery shopping as long as you set aside the money to pay it off and it is within the 30% recommended utilisation rate

The truth is that you can use your credit card for practically anything that is a normal expense for you. You then just require the discipline to set aside the money you would have used from your current account to clear your credit card balance.

The safer alternative to credit building credit cards

Credit building credit cards are not the only option out there to help you boost your credit. The option presented by Wollit is a fantastic alternative that comes without any of the risks that we have just looked at above. They can also work together to try and build your credit even more if you decide to get a credit builder card and a Wollit plan. So, what do we offer at Wollit and how does our service work?

At Wollit we want people to take control of their money. We don’t do any credit checks - with us truly anyone can start building credit. It’s super simple - by signing up for the Wollit Credit Builder Service you’ll access a whole suite of advanced money tools and credit building. Your membership is structured as a loan agreement, so we can report your monthly membership payments to all 3 credit agencies. As the months go by these positive reports build-up and it shows lenders that you can commit to repayments and are responsible with your finances.