118 118 Money has launched a new credit card with a difference. Instead of applying interest and charging fees for overseas use or ATM withdrawals, you pay a monthly subscription fee.
The company, known for their eye-catching adverts for directory enquiries, has targeted the card at those looking to improve a low credit score who frequently clock up penalty fees and charges.
Customers are charged flat-rate fees instead of interest, from £8 per month for a £250 credit limit.
But while flat rate fees sound tempting, it may actually end up more expensive than a standard credit card, even if you clear the whole balance each month or don’t use the card. We take a look.
A good deal? The new card is the first credit card which doesn’t charge interest
According to recent research from the FCA, 5.8 million people – around 18 per cent of borrowers, have problem debts.
It is these people that end up frequently racking up penalties and charges on top of their debts, according to 118 118 Money.
James Poole, chief marketing officer at 118 118 Money said: ‘For many cardholders, their current credit card just isn’t meeting their own particular needs. Because of their situation, they aren’t in control of their finances – and it’s costing them in terms of spiralling interest and charges. These are the people we want to help.
‘Our customers told us what they wanted from their credit card, and we listened. They told us they are tired of being tripped up by high interest fees and hidden charges, which cause them to worry about their card. They want to know where they stand.’
So how does it work?
The credit limit you are offered will determine how much you will pay each month in ‘subscription fees’ according to your current credit score.
As with most lenders the better your credit history the more you are likely to be lent. As your credit score improves 118 118 Money says you will have access to a higher limit but you don’t have to accept it.
118 118 Money gives these examples: a £250 limit costs £8 per month, £500 will cost £14 per month and £1,200 will cost £17 per month.
There are no additional fees other than this. You won’t pay any traditional interest or incur fees for withdrawing money from a cashpoint or using the card abroad.
Unlike a traditional card, it also won’t charge you any penalties should you pay late, the lender says it will also send customers a reminder if you have missed your payment date.
If you miss two payments, 118 118 Money says it will stop the account until you have bought it up to date. You will continue to incur the normal monthly fees on the account if you continue to miss payments, capped at six months.
The flat fees however also mean you end up paying even if you don’t use the card at all.
How do the fees measure up?
For those with the smallest limit, an £8 monthly fee on the £250 limit is the equivalent of 38.4 APR per cent.
On a £1,200 credit limit, the £204 fee equates to 34.5 APR per cent.
The fees therefore work out much higher than the average credit card with an APR of 18 or 19 per cent.
They are also towards the higher end of the spectrum when it comes to credit builder cards, with most advertised at between 25 and 30 per cent APR.
Plus the flat-rate fee structure means charges apply no matter how much of your credit limit you use, even if you don’t use the card at all.
If you are just borrowing a small sum on the card, the flat fee works out particularly high. Furthermore, there is a reduced incentive to borrow as little as possible within your limit as the fee is the same regardless of your balance.
Of course borrowers of conventional credit cards can avoid paying anything at all on their debts by repaying in full each month, while the 118118 Money card requires the fee independent of how much you pay off, and it won’t contribute to clearing any of your balance.
Even those who don’t clear the debt each month may pay less in interest over the course of a year than they would likely pay in fees to 118 118 Money.
For example, to clear a £1,200 debt over the course of a year on a card charging 18.9 APR per cent, you would pay a total of £116.33 in interest.
On the average credit builder card paying 25 per cent APR per cent you could pay £149 in interest, and at 30 per cent APR per cent you would pay £176 in interest.
Building blocks: Specialist credit cards can help those without a solid credit history build up their score.
So what’s a better alternative?
There are of course a number of steps you can take to improve your credit score, from making sure you are signed up to the electoral roll to reviewing joint finances and closing down old accounts.
You can read more advice on boosting your score here.
Lenders ultimately want evidence that you can manage your debts well, and that you have a history of steady repayments.
Unfortunately that generally means borrowing, and as you don’t have the perfect score, the best option with the lowest entry requirements are specialist credit builder cards.
These do have much higher APR rates, as mentioned above they can be closer to 25 or 30 per cent but they offer much lower entry requirements and will allow you to open one if you have had problems with debts in the past.
The eye-watering interest rates mean you MUST make sure you service them properly. This means setting up a direct debit for the full amount to avoid both interest and any penalties for late or missed payments.
These will also be reported to credit referencing sites which will make it even harder to get accepted for credit in the future.
There are a heap of lenders offering credit builder options including the likes of Tesco Bank, Barclaycard, Vanquis Bank, Aqua, Marbles and Capital One.
The lowest rate on a credit builder card available is offered by Vanquis Bank on its Chrome card, at 24.7 APR per cent. The card comes with a maximum credit limit of £1,000 to start, but this increases every 5 months up to a maximum £4,000.
There are also deals aimed at those with a less-than-perfect score that offer interest-free deals or other perks to help improve your credit score
For example, Tesco Bank’s Foundation card (27.5 APR per cent) and the Aqua Classic 29 (29.7 APR per cent) cards both give you free access to your credit rating via noddle for fee to help monitor your score plus Tesco Bank offers Clubcard points for spending.
Aqua has quite a few options in its range, including a Reward Card that pays 0.5 per cent cashback on spending and no fees on overseas purchases. While its Advance Credit Card will lower your interest rate gradually (down to 19.9 APR per cent) if you stick to your limit and monthly repayments (watch out as it does start as high as 34.9 APR per cent).
Remember though, as with any credit card, the more competitive the deal the more restrictive the entry requirements so make sure you check any restrictions before applying.
You can run a search to find the best credit card you are likely to be accepted for here using This is Money’s carefully chosen partner service MoneySupermaket. It has a soft search tool which won’t leave a mark on your credit file and will allow you to see the deals for which you are most likely to be accepted.
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