CUSTOMERS looking to improve their credit score should avoid using certain credit builder products, the FCA has warned.
Over 1.5million Brits have used these services in the hopes of boosting their score but findings by the watchdog suggest they may not always be effective.
Your credit score gives an overall picture of how responsible you are with money.
The score shows lenders whether you’ve been a reliable borrower in the past.
There are a number of reasons why your rating may be low. For example, it may be due to missing payments or not having any credit in your name.
But if your score falls below a certain rating you may struggle to get accepted for a loan, mortgage or certain credit cards.
Credit building services are designed to help improve people’s rating over a certain period of time.
Typically, customers are loaned a small amount of money which stays locked away in their online account.
Over an agreed period of time, you will then make repayments.
If you are successful the provider will then send your results to credit agencies – boosting your credit score.
But the FCA has now said there’s “little proof” these products will actually help improve your credit score or make it easier to get affordable credit.
Plus, the majority of credit builder products looked at by the FCA are unregulated and firms often fail to clearly explain their limitations and risks.
This means consumers could have less protection if they wished to cancel the service or complain.
However, the companies themselves may still be regulated by the FCA for other financial services they may provide.
Many customers are also charged a fee to use these services, with the cost anywhere between £2.50 to £25 a month depending on the firm and option customers have picked.
For example, Loqbox is a credit building service which charges its customers a weekly fee of £2.99 to improve their score by offering them a locked loan.
A spokesperson for Loqbox told The Sun: “We welcome the FCA’s focus on ensuring credit-building products genuinely deliver for consumers. It’s right that the regulator calls out practices that may mislead or fail to improve people’s financial outcomes.
“Loqbox’s mission has always been to build better borrowers, not just better credit scores. We combine credit-building with financial education and coaching to help people understand credit, develop positive habits, and build financial confidence for life.
“We support the FCA’s focus on raising standards and ensuring every product in this space puts transparency, education, and consumer wellbeing first.”
What else can YOU do to improve your score?
Alison Walters, director of consumer finance at the FCA, said: “We found that certain types of credit building products don’t always deliver on their promises.
“We found that certain types of credit building products don’t always deliver on their promises.
“There are usually better, more cost-effective ways to build up your credit, and get free and impartial guidance such as from MoneyHelper.”
There are plenty of free and cost-effective ways to build up your credit.
For example, getting on the electoral register proves who you are and where you live meaning it’s easier to get credit if you’re on the list.
You can sign up by registering to vote on Gov.UK.
Also use a “soft-search” eligibility calculator to show how likely you are to be accepted by credit card providers – websites like MoneySavingExpert.com offer these.
It’s also vital that you don’t make too many credit applications because lots of requests in a short period of time can be seen as a sign of financial distress.
Try and cut down your existing debt before applying for new credit as lenders may be reluctant to lend to you if you already have a large amount of debt.
Using credit-builder credit cards for small affordable purchases can show that you’re a responsible spender and it can improve your chances in the eyes of lenders.
You can find the best offer for you by visiting comparison websites such as MoneySuperMarket.
How to use a credit builder card
You can use a credit builder card to pay for things just like you would with any other credit card.
But there are some key things to remember, warns Alex Hasty, finance expert at Compare the Market.
- Keep up with payments. Always try to pay back what you spend each month in full to avoid high interest charges.
- If you really can’t pay the full amount, be sure to make at least the minimum repayment on time.
- Don’t use more than 25% of your limit : By spending small amounts and paying off the balance in full each month, you’ll prove to lenders that you can manage debt responsibly and steadily build up your credit score.
- Avoid withdrawals: Never make cash withdrawals on your credit card as you’ll face expensive charges.
- Avoid over-spending: ‘It’s best to think of your credit builder card primarily as a way to boost your credit score, rather than a green light to spend money you don’t have.
