How Credit Builder Cards and Interest Work in the UK

Credit builder cards are a category of UK credit card designed for people with limited, thin, or damaged credit histories. They tend to carry higher interest rates and lower credit limits than standard credit cards. Because of these higher rates, understanding how interest is charged — and under what conditions it can be avoided — is particularly important for anyone holding this type of card.

This guide explains the factual mechanics of how interest accrues on credit builder cards, the conditions under which interest-free periods apply, and the regulatory rules that govern minimum payments, payment allocation, and persistent debt. It does not provide financial advice or recommend any particular course of action.

UK credit cards, including credit builder cards, typically offer an interest-free period on purchases of between 20 and 56 days, but only if the cardholder pays the full statement balance by the payment due date each month. If any balance is carried forward from a previous statement, interest is typically charged on new purchases from the date of each transaction, not from the statement date.

Credit builder cards carry representative APRs that generally fall within a range of approximately 29.5% to 49.9%, though some applicants may receive rates significantly higher — up to 62.9% or above — depending on individual circumstances. Interest on UK credit cards is calculated daily, meaning that even short periods of carrying a balance can result in charges accumulating.

Credit builder cards operate on the same fundamental principles as other UK credit cards when it comes to interest, but the higher APRs they carry mean the financial consequences of carrying a balance are more pronounced.

Each billing cycle, the card provider issues a statement showing the balance, the minimum payment due, and the payment due date. The cardholder then has until the payment due date to make at least the minimum payment. The interest-free period on purchases — typically ranging from 20 to 56 days — applies only if the full statement balance is paid by that due date. The maximum 56-day interest-free window applies to purchases made right at the start of a billing cycle; purchases made later in the cycle receive correspondingly fewer interest-free days.

If the full statement balance is not cleared, interest is typically charged on new purchases from the transaction date, not the statement date. This distinction matters because it means interest begins accumulating immediately on each purchase, rather than from the point the statement is produced.

Credit card interest in the UK is calculated daily using what is known as a Daily Periodic Rate (DPR). This is derived by dividing the annual percentage rate (APR) by 365 (or 366 in a leap year, depending on the provider's terms). The daily interest charge is then applied to the outstanding balance, and the accumulated interest is typically added to the account on the statement date. The specific method by which the daily balance is determined — whether on the actual daily balance or an average daily balance — varies between providers and is not standardised by regulation.

Cash advances (using the card to withdraw cash) are treated differently from purchases. They typically incur interest from the date of the transaction with no interest-free period, even if the cardholder pays the full statement balance by the due date. Cash advances also often attract a higher rate of interest than purchases, along with a handling fee of typically around 2–3% of the amount withdrawn.

Several regulatory rules directly affect how interest and payments work on credit builder cards.

Minimum payment requirements

For credit card agreements entered into on or after April 2011, FCA rules (CONC 6.7.5R) require that the minimum payment must cover at least the interest, fees, and charges applied to the account, plus 1% of the outstanding principal balance. In practice, many providers set a higher minimum — commonly around 3% of the balance, or a fixed monetary amount such as £5 or £10, whichever is greater.

Payment allocation

Under FCA rules (CONC 6.7.4R), credit card providers must allocate repayments to the portion of the debt carrying the highest interest rate first, then to the next highest, and so on. An exception exists for fixed instalment plans, provided the provider reasonably concludes the plan is in the cardholder's best interests and ensures the cardholder can make an informed decision. This rule took effect on 1 October 2021.

Persistent debt intervention

The FCA defines "persistent debt" as a situation where the cardholder has paid more in interest, fees, and charges than in principal over an 18-month rolling period, and the balance stands at £200 or above. When this threshold is met, a three-stage intervention process applies:

1. At 18 months: The provider must notify the customer and encourage increased payments.
2. At 27–28 months: A further reminder must be sent if the customer remains in persistent debt.
3. At 36 months: The provider must offer repayment options over a reasonable period (typically 3–4 years) and must show forbearance — which may include reducing, waiving, or cancelling interest and charges — if the customer cannot afford increased payments.

These persistent debt rules came into force on 1 March 2018, with full compliance required by 1 September 2018.

Interest rate change notification

Providers must give customers at least 30 days' advance notice of any interest rate increase. Customers have the right to reject the increase and pay off the existing balance at the previous rate within 60 days of notification.

Default charges

The Office of Fair Trading (now the FCA) established a threshold of £12 for credit card default charges, with a presumption that charges exceeding this level are unfair. This is an enforcement priority measure set in April 2006, not a statutory maximum. Individual consumers retain the right to challenge charges below this threshold.

The interest-free period is conditional, not automatic

A common misunderstanding is that credit cards always provide an interest-free window on purchases. In reality, the interest-free period only applies when the full statement balance has been cleared by the due date. If any balance is carried over from the previous month, interest typically accrues on new purchases from the date each transaction takes place.

Representative APR does not mean guaranteed APR

The representative APR advertised on a credit builder card is the rate that must be offered to at least 51% of successful applicants. The remaining applicants may receive a higher rate. For credit builder cards, where advertised representative APRs already range from approximately 29.5% to 49.9%, the rate actually offered to an individual could be higher still — up to 62.9% or more. Rates are typically variable and linked to the Bank of England base rate, though increases are not always passed through on a one-to-one basis.

Paying the minimum keeps the account in good standing but may result in persistent debt

The minimum payment is set to cover interest, fees, and charges plus at least 1% of the principal. Paying only this amount means the vast majority of each payment goes toward servicing the debt rather than reducing it. The FCA's persistent debt rules exist specifically because of this dynamic: FCA analysis has indicated that, on average, customers in persistent debt may pay around £2.50 in interest and charges for every £1 of principal repaid, though exact figures vary by dataset and period.

Credit builder cards and "credit builder products" are not the same thing

An FCA review published in November 2025 found little evidence that certain standalone credit builder products — specifically, fee-based services that report regular payments to credit reference agencies without involving regulated credit — are effective for most consumers in significantly improving credit scores. Five firms stopped offering such products following FCA engagement. This finding relates to those standalone products, not to credit builder credit cards.

Balance transfers and interest-free periods

In many cases, carrying a balance transfer on a credit card prevents the cardholder from receiving the standard interest-free period on new purchases, unless the provider explicitly offers a combined or separate promotional arrangement. Without such terms, the standard interest-free period typically does not apply when any balance — including a promotional one — is being carried.

Cash advances

As noted above, cash advances do not benefit from an interest-free period under any circumstances. Interest is charged from the date of the withdrawal, and a cash handling fee of typically around 2–3% also applies. This remains the case even if the full statement balance is paid on time.

Section 75 protection still applies

Credit builder cards are credit cards for the purposes of the Consumer Credit Act 1974. This means Section 75 protection applies to purchases with a cash price exceeding £100 but not more than £30,000, making the card provider jointly liable with the merchant in cases of breach of contract or misrepresentation. This protection applies even if only a deposit was paid by credit card, and claims can typically be made up to six years from the transaction date, subject to normal time-limit rules and evidential requirements. Section 75 does not apply to debit cards, charge cards, or payments made through certain third-party processors.

Credit limits on credit builder cards

Initial credit limits often start as low as £150–£250 and may range up to £1,500 or more, depending on the provider and the applicant. Some providers offer limits up to £2,500 or £3,000 in certain circumstances. Providers may increase limits after a period of demonstrated responsible usage.

The defining characteristic of credit builder cards in the context of interest is the combination of higher APRs and lower credit limits. The average APR for credit builder cards is approximately 36.2%, with typical representative rates falling in the range of 34.9% to 49.9%. For context, the average APR across all UK credit cards was 24.66% as of January 2026, having risen from 22.42% in January 2023.

Because interest is calculated daily, even a relatively modest balance on a credit builder card generates charges more rapidly than the same balance would on a card with a lower APR. The interest-free period mechanism means that whether or not interest is charged on purchases depends entirely on whether the previous month's full statement balance was paid on time. Once that condition is no longer met, interest begins accruing from the transaction date on every new purchase.

The FCA's payment allocation rules mean that when a card carries balances at different interest rates — for example, a purchase balance and a cash advance balance — repayments are directed to the highest-rate balance first. The persistent debt rules provide a regulatory backstop: if a cardholder's payments over 18 months have gone more toward interest, fees, and charges than toward reducing the principal, the provider is required to intervene and, at the 36-month point, must offer structured repayment options and show forbearance where the customer cannot afford to increase payments.

Pre-contract disclosure requirements under the Consumer Credit (Disclosure of Information) Regulations 2010 mean that providers must supply specific information — including the APR, interest rate, total amount of credit, and all applicable charges — before a credit agreement is entered into. This information must be presented in a prescribed format.

• The interest-free period on purchases is available only when the full statement balance is paid by the due date each month. If any balance is carried over, interest typically accrues on new purchases from the transaction date.
• Credit builder cards carry higher APRs than standard credit cards, with representative rates typically ranging from 29.5% to 49.9% and individual rates potentially reaching 62.9% or above.
• Interest is calculated daily using a Daily Periodic Rate derived from the APR. The divisor used (365 or 366 in a leap year) and the specific calculation method vary between providers.
• Cash advances do not qualify for an interest-free period and typically attract higher rates and additional fees.
• FCA rules require payments to be allocated to the highest-rate balance first and set minimum payment requirements of at least 1% of principal plus all interest, fees, and charges for agreements entered into since April 2011.
• The persistent debt rules require providers to intervene when a customer has paid more in interest, fees, and charges than in principal over 18 months, with structured support required at the 36-month point.
• Section 75 of the Consumer Credit Act 1974 applies to credit builder cards, providing joint liability protection for purchases between £100.01 and £30,000.