Beware the credit score boosting cards stinging users with up to 60% interest charges
CREDIT builder cards designed to help you improve your score are still charging customers interest rates of up to 60 per cent.
That’s almost six times the rate of a standard low-cost credit card that charges around 9.9 per cent.
Last year, an investigation by The Sun found that some card builders are charging up to 60 per cent on outstanding balances on these cards.
And it turns out that they’re still not much better a year on.
Origin still has a headline rate of 59.9 per cent, meaning paying off £1,000 debts in 12 months will cost you £479 in interest.
It will take you six years and seven months to pay back the full balance if you only make the minimum repayments – plus you’ll repay £875 interest on top.
But it will take you almost three times as long to pay off the debts on an Aqua Start card, even though the 49.9 per cent interest rate is lower.
That’s because it sets its minimum monthly payments at less, at 1 per cent or £5 (whichever is greater), compared to 4.5 per cent or £5 (whichever is greater) on the Origin card.
As a result, you could end up spending 21 years and 11 months paying off the debt and accruing £3,152 in interest cost.
Builder cards are supposed to help customers with low credit scores who are normally excluded from the best, most affordable rates from high street lenders.
But in return for lending to borrowers who are typically on low incomes, specialist card providers charge high interest rates.
These interest rates won’t be slapped on balances as long as they’re paid off before the end of the month.
5 ways to improve your credit score
1. Cancel any old, unused cards – lenders often don’t like it if you have lots of cards already.
2. Pay all your bills on time – set up a direct debit to pay your phone, mortgage or utility bills automatically each month so you don’t have to remember.
3. Don’t apply for lots of cards – each time you apply for a card it leaves a record, which can hurt your credit score.
4. Go solo – if you have a joint account with someone who doesn’t manage their money well it can impact on your credit score.
5. Check your credit report for errors – mistakes happen or could be a sign of fraud. If a black mark is accurate or you have a good explanation for it, you may be able to add a statement to your credit file to explain it.
But the truth is, many people don’t use their cards in this way and only make the minimum repayment every month according to StepChange, leaving balances rolling on to the next month and interest racking up.
This damages their scores further and can often lead to bigger, unmanageable debts.
It’s important to remember too that you may be offered an even more expensive rate after you’ve applied for a card.
That’s because companies only have to give 51 percent of successful applicants the advertised rates, while the remaining 49 per cent may be offered worse deals.
Rachel Springall from comparison site Moneyfacts.co.uk reckons that while high rates do incentivise shoppers to pay off the debts every month, not everyone can or does.
She said: “If borrowers are only making the minimum repayments their debts will sit over them for a long time, and interest will build up to eye-watering levels.
Alternatives to credit builder cards
IF you want to improve your credit rating without resorting to a credit builder card, you could consider a pre-paid credit repair card.
These cards typically charge a monthly fee but are a good budgeting tool.
Alternatively, you might consider services such as Loqbox, which lets you save money monthly in a way that helps build your credit score.
You can also show lenders that you can manage credit well by taking out a mobile phone contract or household utility bill and paying in full and on time.
“Consumers with debt troubles are clearly vulnerable and they would be wise to seek out financial advice before they damage their credit score beyond repair.
“Lenders should also be on hand to work with consumers to make sure they are not borrowing more than they can afford to repay.”
A Vanquis Bank spokesperson, the brand that provides the card with the highest rate – the Origin card – told The Sun that customers who opt to pay the monthly minimum charges are “in the minority”.
They added: “In recent months Vanquis Bank has made a number of changes to its credit cards to encourage customers to pay off their borrowings quicker, saving them time and money.
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“These include increasing the monthly minimum payment, introducing a higher “recommended” minimum payment, reducing the interest rate for cash withdrawals to the purchase interest rate, and being more proactive in reducing APR rates for customers on our higher rate APRs.”
A spokesperson for NewDay, the name behind Aqua – the second worst card by APR and the worst for the length of time it will take to pay off debts when making the minimum repayments – said that the majority of customers actually receive a lower rate then advertised.
It said: “Supporting our customers to be better with credit is extremely important to us and we are pleased that the majority of our customers improve their credit score within the first 12 months of using one of our credit products.”
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