Plastic can be a better friend than payday loans to those trying to build a better credit rating

Last week we saw the launch of a new credit card advertising an APR in excess of 35 per cent. Cue a rant about the extortionate interest rates, you may assume. But instead I would prefer to focus on the positive – ie, the option that it gives people seeking to rebuild their credit status.

Since the onset of the credit crunch many people have seen their credit score tarnished, often through circumstances beyond their control.

The economic recession has hit households hard, with unemployment reaching a 17-year high in February, and although the numbers have improved slightly, 8 per cent of the UK population are still without work.

The upshot is that there are now many more people with a less than perfect credit score, making them ineligible to borrow from banks and building societies.

Even though the “best buy” tables are littered with 0 per cent credit card deals for 20 months plus and with personal loan rates at a five-year low, you’ll be wasting your time applying for these headline deals unless you have a pristine credit history.

But put yourself in the position of someone who used to borrow from their bank before falling into arrears while out of work and who consequently finds they are no longer able to obtain credit from this source.

To whom do they turn for ­finance now?

Even though the UK – and Scotland in particular – has a growing credit unions movement, it is the payday and doorstep lenders with high-profile advertising campaigns and a growing high street presence where more people are going and paying a very high price for their borrowing.

The only real way to get out of this situation is to take steps to repair your credit record and that is where the credit cards with the high interest rates come in.

Most credit card companies will turn you down flat if you have got a history of missed and late credit payments or a sheriff court judgement.

But credit cards from Luma and Vanquis enable customers who have struggled with debt previously, or who have a limited credit history in the UK, to apply for its plastic and give them a genuine chance to turn things round financially.

The interest rates are well below those charged for payday loans, with Vanquis charging a representative APR of 39.9 per cent and Luma 35.9 per cent.

It’s not cheap, but compare it to the payday alternative. Borrowing £400 on a credit card at 39.9 per cent APR will cost you £13.55 in interest for one month, whereas the same sum borrowed from Wonga will set you back £125.48 in interest and fees at a representative APR of 4,214 per cent.

To rebuild your credit status, you need to demonstrate a history of using a credit card in a responsible manner, so if you use the card and make payments on time every month then over time your credit score will get better. If you repay the statement balance in full each month that’s even better, as you’ll be improving your credit score without paying any interest charges in the process.

You won’t fix your credit rating overnight, but these cards give an opportunity to prove that you are financially responsible and in time could see you regain the ability to borrow at lower interest rates from high street banks and building societies.

l Andrew Hagger is an independent personal finance analyst