#New Tesco credit card for people with bad credit

Tesco Bank has launched a credit card aimed at people who have such a poor credit rating that they cannot get a mainstream card - or those who have never borrowed anything before and are struggling to be accepted elsewhere.

The Foundation Clubcard credit card is designed to help people build a credit record. So is it a good idea?

Many people struggle to take out a normal credit card. Some have had problems with debts in the past, and late or missed payments will stay on their record for six years. Others are simply new to the world of credit, so don't have any record of borrowing and making repayments at all - which makes lenders very wary.

The card

David McCreadie, Managing Director, Banking at Tesco Bank said: "We understand that some customers can find it difficult to access credit if they have a limited credit history. The Foundation credit card can help these customers build their credit rating which may help them access lower APR products in the future."

By taking out a Foundation credit card, people can spend money on the card and then repay it in time to build up a record of regular payments. The card has a low spending limit to start with - often around 250 - which will be reviewed over time.

There are already a few cards aimed at this market. Vanquis Bank has a Black Diamond card with an APR of 59.9%, Barclays offers an Initial card with an APR of 34.9%, Vanquis offers the Aquis card with an APR of 29.8% and Capital One has the Classic Preferred card, with an APR of 28.9%. The Foundation credit card matches the Capital One rate.

Is it a good idea?

In many ways these credit cards are highly useful tools. Tesco Bank is going even further than some other providers, by packaging the card up in a way that encourages people to use it wisely.

They ask borrowers to sign up to a monthly direct debit to pay off their card, they provide straightforward information for people on how they can manage their account in order to build a better record. They will also offer text message alerts to remind them to make a payment on time, and a text message alert when they are close to reaching their credit limit.

Andrew Hagger of Moneycomms.co.uk is convinced. He said: "It's good to see a high profile lender offering an affordable finance option to consumers who are currently excluded from mainstream credit."

They can also be used in conjunction with other ways of improving your credit rating, which we reported on recently.

The downside

However, there is one pitfall to bewared of. The credit card also works as a Clubcard in-store, and offers double Clubcard points to shoppers. This needn't be a bad thing. If borrowers can keep control of their budgets, they can do the weekly shop at Tesco and earn the extra points by paying on their credit card. They can then keep their grocery budget aside in order to pay off their debts in full and on time without racking up interest charges.

If they don't keep control of their budgets, however, they will find themselves borrowing at a high interest rate in order to fund the basics in life - which is a key indication that your finances are awry.

Of course, not everyone who has had problems with debts in the past is going to fall into the same bad habits, but you have to ask whether the rewards offered for grocery shopping could tempt people into making mistakes.