The What’s What of Credit Building

If you’ve been advised to look into credit building or you’re trying to work out if it’s for you, you’ll need to get your head around all of the terms and cards and loan products. While this might not be the most fun thing in the world, it’s important to ensure that if you choose to sign up to a credit builder service, you’re making the smartest possible choice.

To help, we’ve rounded up and summed up some of the key terms you’re likely to hear, hopefully saving you the job of trying to decode finance jargon!

Credit builder cards and loans

These are cards and loans specifically designed for people with a limited credit history. The idea is that by taking out one of these forms of credit and demonstrating you’re able to make repayments, you’ll be able to build up your credit score. However, like with any borrowing you do, it’s important that you use credit builder cards and loans sensibly. This might mean making sure you pay off the money you borrow on time, for example.

Credit builder pre-paid cards

With pre-paid cards you load cash on them and use them to pay for goods/services   in return for a monthly fee. Credit checks or proof of income aren’t required, so you can sign up easily. Once you’ve done this, you add a credit builder service to the card and then the lender will allow you to draw on a year’s worth of monthly fees. This is usually between £5 and £10 a month.

Unsecured loan

This is a loan that’s given to you based only on your creditworthiness. You don’t need to put up any of your possessions for collateral.

Secured loan

If you’re not deemed to be creditworthy for an unsecured loan, you may want to use one of your assets to act as security for the lender that you will make repayments. However, be aware that by doing this, you run the risk of losing that asset if you fail to repay the loan on time.

Log book loan

This is another type of secured loan where you transfer ownership of a car, van or motorcycle (it must be worth more than £500 with no finance outstanding) to a logbook lender. This form of lending means you get to keep and use your vehicle. However, it’s important to note that if you can’t make repayments you could lose your vehicle. What’s more, interest is a lot more expensive than traditional forms of lending, so if you’re struggling with debt you might find yourself in a worse position.

Guarantor loan

If you’re struggling to get credit, you might be eligible for a guarantor loan. These are unsecured loans that require a guarantor to co-sign the credit agreement, essentially making that person liable if you default on payments. As you might expect, not everyone is willing to enter into this sort of agreement, because if you borrow money and then can’t pay it back, the person who co-signed the agreement for you will have to pay that money on your behalf.

APR

This is short for annual percentage rate and it basically reflects the annualised interest on any given loan, as well as the charges you have to pay, such as an arrangement fee. This makes it easier to compare different credit options.

Thin file

If you don’t have enough of a credit history for a credit reference agency to generate a score and report, you will sometimes be referred to as thin file. This means you’ll need to start building your credit if you want to generate a report and ensure you’re an attractive prospect for lenders. Of course, building credit takes time but by using credit builder products effectively, managing your finances and getting on the electoral roll (if you aren’t already), you will be able to receive a report eventually.

Once you understand what all the different credit builder terminology and services are, you’ll be in a good position to start creating your credit history and growing your score.

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