How credit builder products work and what they can do for your score

Without a credit history it can be tricky to take out traditional credit products like a credit card, car finance, or a personal loan.

Typically, lenders look at how you’ve handled credit in the past to predict how you’ll handle any credit they give you in the future. If you’ve never used credit before, and don’t have a credit report, lenders have no evidence to help them work out how likely it is that you’ll pay them back.

There are products like credit builder credit cards available, which are designed to help people with bad credit or little credit history. But, if you have no credit report at all, then these may still be out of reach.

But, it’s not the end of the road. There are some products out there which you can get without a credit check, that can help you to build up your credit history from scratch.

Guarantor loans let you borrow money in your name, but you’ll need to ask someone else (the ‘guarantor’) to agree to take responsibility for the loan if you can’t pay it.

Your guarantor could be a friend, relative or a partner who knows and trusts you. The loan provider will usually talk to both you and your guarantor to make sure everyone is on board and understands the commitments.

Pros:

• The loan will be in your name, which means that all your repayments will be reported to a credit reference agency under your name too, which will help create a credit report for you. (Just make sure you repay on time).
• Unlike many other credit builder products, the money you borrow can be used as you wish.

Cons:

• Guarantor loans can have quite high interest rates - normally between 30 to 50%.
• You’ll still need to prove that you can afford the repayments to be accepted for many guarantor loans, meaning you may need to provide proof of a regular salary.
• They may not be suitable if you're just looking to build up your credit history, because you're borrowing a potentially significant sum. You will have to pay back everything you owe, plus interest.

These work like any other prepaid debit card - you load money up onto the card and then you can use them for purchases, bank transfers and to withdraw cash. There is usually a set monthly fee to use the card.

But with a few prepaid cards, such as CashPlus and iCount, they also offer a ‘credit building’ option which you can add on to the card.

These work by giving you a small, interest-free loan to cover the cost of one year of monthly fees. This money goes directly to the card company, so there’s no temptation for you to spend it. You then pay your monthly fee as usual, but each payment actually goes towards repaying the loan.

These payments are reported to the credit reference agencies, helping to build your credit history by showing that you are a reliable borrower (as long as you pay on time).

Pros:

• There are no credit checks needed to take out these products, which means anyone can get them. And because you’re not being lent a significant sum of money, these cards don’t require any proof of income.
• Prepaid cards can be a useful budgeting tool, as you can only spend the money that you’ve loaded onto the card.

Cons:

• You have to pay a monthly fee to use the card.
• Any late or missed monthly payments when using the ‘credit builder’ options could damage your credit score.
• There may be additional fees and charges for set-up, ATM withdrawals, and money transfers.

With product such as LOQBOX, you can regularly save money while building your credit score.

You first commit to saving a set amount over a year, and then LOQBOX locks away a 0% APR loan for that amount. While you save throughout the year, LOQBOX reports your loan payments to credit reference agencies (CRAs) so that your credit history improves. After making your monthly payments for a year, your loan is repaid and you leave LOQBOX with an improved credit score and your money back into a new account for free.

There are a few other things that you can do to start creating a good credit history. Having these things on your credit report can help prove who you are and that you can responsibly manage your finances.

• Ask your bank for a small overdraft facility. Since it’s a form of credit, it shows up on your credit report. You don’t have to use your overdraft. In fact, it’s usually better not to, as overdrafts tend to be expensive due to the interest you pay.

• Get your name on utility bills. More and more, companies such as utilities and broadband providers are sharing data with credit reference agencies.

Before you rush to take out every one of these products, it’s worth remembering that any negative behaviour, such as late or missed payments can actually harm your score before it’s started. Make sure not to take on too much all at once and you'll be well on your way to building up your score.