Warning over cards that aim to improve credit scores charging up to 70% interest
Card firms are stinging customers looking to improve poor credit scores with sky-high interest rates of up to 70 per cent
CARD firms are stinging customers looking to improve poor credit scores with sky-high interest rates of up to 70 per cent, The Sun can reveal.
In the most extreme cases, credit builder cards charge the same rates as high-cost credit rent-to-own firms BrightHouse and PerfectHome.
The cards are aimed at those with poor credit scores as a way to boost them. Customers are often on low incomes or those with no history of taking out credit.
The idea is that if they can keep up with their repayments and prove they can manage credit well then their credit score will improve and they'll be able to borrow money more cheaply in future.
But experts warn that if they fall behind on repayments they will end up borrowing more money, putting their credit scores at risk and adding to their debts.
Should there be a cap on credit card interest rates?
IN 2016, the Financial Conduct Authority warned about customers of cards with high interest rates ending up in persistent debt.
Later this year, it is introducing new rules for lenders - including ensuring card providers assess whether a customer is at risk of not being able to make repayments - to help customers who are struggling to pay off credit card debts as a result of a study into the credit card market.
But the City regulator has shrugged off calls from campaigners and experts to cap credit card rates.
This is despite taking action to cap payday loans in 2015 – a measure which has halved the number of people with unmanageable debts.
It has also said it will cap costs for rent-to-own customers, after The Sun called for the regulator to put a limit on the amount of interest that these firms - including BrightHouse and PerfectHome - can charge as part of our Stop The Credit Rip-off campaign.
James Daley, founder of consumer champion site Fairer Finance, said: “There is a legitimate question to be asked about whether cards charging 50 per cent or 60 per cent interest are being exploitative – especially given the fact customers of these cards are potentially more vulnerable.”
Peter Tutton, head of policy at debt charity StepChange, said that these cards can be an “expensive form of borrowing, especially if balances roll over and people default on them.”
He added: “There is a risk that people can be trapped in persistent debt, which runs counter to building a good credit score.”
Lots of card firms offer 0 per cent interest deals on credit - but these rates are only available to those with perfect credit scores.
It's time to Stop the Credit Rip-off.
The average rate offered on a credit card is 23.4 per cent, while our research reveals that credit builder cards charge up to 70 per cent.
For example, Vanquis Bank’s Origin credit card and NewDay’s Aqua Start Mastercard both charge customers up to 69.9 per cent, despite advertising their rates as 59.9 per cent and 49.9 per cent respectively.
This is because card firms only have to give 51 per cent of successful applicants the advertised rate, while the remainder can be offered much higher rates.
If a customer borrowed £1,000 at 69.9 per cent it could cost up to £542 a year in interest.
But often customers end up paying back just the minimum amount. If they did this (assuming the minimum payment is the greater of 5 per cent or £5) the £1,000 at a rate of 69.9 per cent would take 31 years and three months to pay back - at a total of £5,884 in interest.
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 are they all bad?
Borrowers often start with low credit limits, which are increased once customers have proved they can manage the credit.
They also do not charge any interest at all if you clear the balance in full at the end of each month.
Charlotte Nelson, finance expert at Moneyfacts, said: “Credit repair cards are just like any other credit a customer takes out in their name so, used correctly, they can help to show the customer is able to manage their credit.
Latest from Stop The Credit Rip-Off
“However, they do charge higher rates than other cards and also have lower credit limits.”
NewDay claims the “majority” of customers improve their credit scores within the first 12 months of using a card.
A Vanquis Bank spokesman said: “For a small minority of customers to whom we cannot offer our lower APRs but can offer a card, we have APRs up to 69.9 per cent.
“However, to ensure these customers have access to credit in a manageable way these cards come with a low initial credit limit of £150.
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 , 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.
“By making these cards available, we are able to include those who would not be able to access credit elsewhere and provide these customers with many advantages including allowing an individual to build a credit record, to make purchase online and to benefit from the consumer protections that are unique to credit cards.”
A NewDay spokesman said: “The Aqua Start card is designed to give people, who would otherwise struggle to access credit, a means of establishing a positive credit history.
“After meeting NewDay’s affordability and credit criteria, they receive lower, sensible credit limit as well as a range of tools to help give them more control of their borrowing.
“NewDay actively monitors its customers, offering support including credit education, alerts, interest and fee waivers and payment holidays to ensure they have all they need to manage their account and build up their credit rating.”
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