Everything you need to know about credit builders
July 9, 2024
Building up your credit history is key if you ever want to get a loan, apply for finance on a car, or take out a credit card. It's also increasingly important for renters as landlords can run credit checks before accepting you as a tenant.
There are a few ways to steadily improve your standing, and credit builders are arguably the best way to kickstart your financial health.
In this guide, we explore what they are and how they work before looking at Pockit, a solution which you can sign up for in just three minutes.
What is a credit builder?
Credit builders are special credit accounts or schemes designed to start credit building by reporting responsible financial actions to the main credit reference agencies (CRAs) that produce credit scores.
Credit builders broadly fall into three main categories. These are credit builder accounts, credit builder loans, and credit building schemes that use things like your rental payment to build your credit score.
Credit builder loans work by taking out a small loan, but instead of receiving the money upfront, it's placed in a secure account that you can't access.
You then make regular monthly payments towards the loan, including interest, and receive the amount back when paid up.
While this does help to build trustworthiness and credit score, it does mean your money isn't accessible. These solutions also don't come with many of the benefits of a credit builder credit card.
For those looking into how to build credit scores, there are also credit-building schemes. These use rental payments to show credit reference agencies you are capable of making consistent payments. Again, these don't come with many of the benefits of dedicated credit-building accounts like Pockit.
How do credit-building accounts work?
To understand credit builders it's a good idea to first get your head around how credit scores work.
In the UK, credit scores are produced by what's called credit reference agencies, commonly called CRAs. These companies collect and store credit information about both individuals and businesses.
Their main function is to give lenders a way to accurately assess how creditworthy somebody is so they can make responsible decisions on lending.
They get data from multiple sources, including public records, lenders, and utility companies, to create a credit history that paints a picture of how financially responsible a person or company is.
Each CRA has its own algorithms, scoring systems, and definitions of what constitutes good credit. This means scores can vary slightly between providers. That said, a good score with one generally means a good score with another.
There are three primary CRAs in the UK: TransUnion, Equifax, and Experian. When you run a credit check online, the company doing the check will use information from one of these three.
You can check your credit score online with free tools such as those provided by Experian, ClearScore and MoneySupermarket.
Credit-building accounts work by having you make regular payments into an account. These payments are then individually reported to the three main credit reference agencies to show them you can reliably make payments, proving your financial responsibility. This helps with building credit scores and shows lenders you can be trusted.
In some ways they work similarly to prepaid cards, however, there are some key differences. For an in-depth comparison check out our article on credit builders vs prepaid cards.
What is Pockit’s credit builder?
With Pockit's Credit Builder, all you have to do is reliably make a small monthly payment of £9.99. This gets reported to the three primary CRAs and helps to show lenders you are financially reliable. You improve your credit score by consistently managing the payments.
As well as helping improve your credit, you also get access to amazing benefits like:
Cashback Rewards
- Get up to 15% cashback and discounts with selected high-street brands.
- Get 2.5% back on all other spending & Direct Debits on the first £100 spent.
- Save up to £264 on mobile, TV & broadband bills.
Purchase Protection
- Protect your eligible purchases of up to £1,000 in case of damage, theft or returns.
- Refund up to £1,500 of unused tickets if eligible.
- Extend warranty by 12 months for brown goods.
FAQs
Can you use a credit builder as an immigrant?
Yes. Credit builders don't require a long UK credit history or high credit score to set up, making them perfect if you've newly arrived in the UK and want to start building credit.
Can you use a credit builder if you have been declared bankrupt?
You will need to check with the individual provider of your credit builder to make sure you are eligible as some may have restrictions. With Pockit, though, you can start building credit right away!
What documents do you need to open a credit-builder account?
Different providers will have different requirements, but generally, proof of address and proof of identity is required. You can find the individual requirements on the website of the credit building service you're looking into.
