A New Way To Repair Your Credit Rating

There's a new credit card that can be used to improve damaged credit records. But is it worth paying for?

Over the past year, The Fool has had countless angry reports from sensible spenders with stable incomes and strong credit histories -- who say they still can't get the credit card or loan they require.

It's true that, since the credit crunch, many lenders have seriously tightened their belts. Nowadays, it seems, only those with spotless credit histories are accepted for market-leading products.

So, what hope is there for someone with a less than perfect credit rating? And should you pay for the privilege of improving yours?

Finding out the facts

If you fear you have a chequered credit history, it's a good idea to get hold of a copy of your credit report. There are three major credit referencing agencies: Experian, Equifax and CallCredit.

If you sign up for a free 30 day trial with Experian, you can access a detailed version online. (Just remember, if you don't want to continue with the service and pay the monthly subscription charge, you'll need to cancel before the 30 days is up).

Alternatively, you can request copies of the file each major credit referencing agency has on you for a cost of £2 each -- but this has to be done through the post, so the process will take longer.

Whichever method you choose, I think it's important for all of us to check our credit reports regularly to ensure the information they hold is accurate. As Donna Werbner reported in this excellent article, a single mistake made by a third party could result in your being denied credit through no fault of your own.

If you discover your credit rating is weak for genuine reasons, however, there are things you can do to help repair the damage.

Alternatively, if you have no credit history at all, you'll need to start building one if you're to have a chance of borrowing in the future.

Simple steps

Certain `traditional' methods of improving your credit rating are straightforward as well as effective. Ensuring you're on the electoral roll, for example, can make a bigger difference than you'd expect to prospective lenders.

My Foolish friend Szu Ping Chan suggests some steps for rebuilding a damaged credit rating, or starting one from scratch, here.

You may also want to consider getting hold of a special credit card specifically designed for those who can't get credit elsewhere. These `Adverse Credit' cards typically have horribly high APRs of around 35% -- so it's crucial to be aware that it's a terrible idea to borrow using one. However, as Jane Baker explains here, spending on one each month -- but always paying off your balance in full -- should help to improve your credit rating. Best of all, it won't cost you a penny.

Paying your way back into credit

We at The Fool have long been suspicious of any product that promises to improve your credit rating, yet costs you money.

Avoid any company that promises to `amend' your credit report on your behalf: they simply don't have the authority to do this, and could be out to take advantage of you when you're feeling vulnerable.

That said, there is now a pre-pay card on the market which offers a credit-building facility. It will cost you around £70 to use the Cashplus Prepaid Gold MasterCard for 12 months, but it could make a positive difference to your credit rating.

How it works

When you take out an ordinary Cashplus Gold card, you'll have to pay an initial upfront 'card issue fee' of £9.95. Thereafter, the card costs £4.95 per month to run.

Adding the credit builder facility to Cashplus won't cost you anything extra -- all you'll need to do is sign up for it once you've been accepted for the card.

When you opt to use credit builder, the £4.95 fee normally payable will be covered by a credit agreement between you and Cashplus. Effectively, they will give you an interest-free loan of £59.40 which is repayable in monthly installments.

Each monthly fee you pay will count as a loan repayment, so that after a year the completely repaid loan should appear on your credit report. In theory, this should have a positive impact on your credit rating and your ability to get credit elsewhere.

So, the total cost of this card (including the initial car issue fee of £9.95) is £69.35 over 12 months.

Is it worth trying?

In my view, credit builder is an interesting idea -- and could be very useful for some people.

It is a more expensive option than plumping for an adverse credit card. However, even these can be difficult to get for those people with truly troubled credit histories -- whereas the Cashplus Gold card is available to all, and does not require applicants to undergo a credit check.

What's more, the fact that you can only spend what you load onto the Cashplus card could be a real bonus. A card like this can assist with budgeting, and it's also worth noting that it offers users Section 75 protection in the same way as an ordinary credit card.

Anyone concerned they may be tempted to spend on an adverse credit card might want to consider Cashplus as an alternative. Getting into debt on a card charging a high level of interest could be far more expensive in the long-term than simply stumping up £69.35 in one year.

You must, of course, ensure that your Cashplus card has enough money loaded onto it every month to cover the £4.95 loan repayments. If you fall behind with them, this will damage your credit rating and could leave you worse off than before.

Overall, however, I still think adverse credit cards are a better option than the Cashplus card. That's because, as long as they're properly handled, they offer users the opportunity to improve their credit rating for free.

However, Cashplus may appeal -- and prove a good solution -- for some people.

What do my fellow Fools think? Please post your thoughts in the comments space below.

More: How To Improve Your Credit Rating | How To Build An Excellent Credit History |The Secret Way Banks Keep Tabs On You