If you don't have the best credit score you might have a difficult time getting approved for loans or traditional credit cards. Your credit score can have an impact on a lot of aspects of your financial life, making it harder for you to make larger purchases that people with good credit are able to make because of credit cards and other loan options.
When you're struggling because of your poor credit history, or lack of credit history because you're young or a recent migrant, there are steps you can take. One of the best options to start rebuilding your credit is to look for credit cards that build credit over time. Whether you're dealing with bankruptcy or another form of insolvency, improving your credit score using a secured credit card is a great first step in getting back on track financially. You have a number of options when it comes to credit cards for bad credit in Canada, as most major banks offer secured cards as an option through their websites or branches.
Security deposit or collateral
A secured card, unlike an unsecured one, requires a security deposit to open the account. That deposit dictates how large a credit limit your card will have, and is used as insurance (known, in this case, as collateral) in case you aren't able to make your payments. The good thing about this type of card is that if you make your payments on time you can use that payment history as a way of getting approved for an unsecured credit card.
Interest rate and repayment
When someone thinks of credit cards for people with bad credit they typically think of high interest rates and multiple fees. However, if you shop around there's a good chance you can find a card that has a manageable interest rate. There can be fees attached to both unsecured and secured cards, such as an annual fee, but if you know what you're getting into you can budget accordingly for these costs.
Of course, when it comes to repayment it's essential that you make your payments on time each month. Even if you can't pay the full balance, you should be putting down the minimum payment to make sure you never miss a bill due date, and preferably a lot more than the minimum. A good rule of thumb when it comes to building credit with a credit card is to try and stay below 30% of your credit limit. This shows lenders that you're able to use the card and make payments without overextending yourself.
Effect on your credit score
If you budget your finances properly and stay on top of your credit card payments, using a credit card to improve your credit score is a good idea because the card issuer will report your good payment record to Canadian credit bureaux.
Effect on your credit limit
One of the nice things about using a secured card is that you're basically setting your own credit limit through the deposit you put down on the card. If you put less money down you'll have a smaller balance than if you put down a larger deposit. Just remember that the goal is to improve your credit score to the point where you can move over to an unsecured card where there are fewer fees and you get your deposit back.
Credit repair after insolvency
Repairing your credit after declaring bankruptcy or dealing with another form of insolvency can be overwhelming. You just need to remember that there are systems in place to help you get back on your feet. Not only can you work with an insolvency firm or speak directly to creditors, but you can also use budgets and credit cards to start repairing your credit.
The most important first steps you can take after dealing with bankruptcy is to set a budget for yourself that will work, based on fixed expenses and incomes. Once you have those figures sorted out, you can start looking into opportunities to improve your borrowing power. Working with a bank is a great way to begin rebuilding your credit score and can be invaluable when it comes to learning about other options you may have.
Convenient payment method
Outside of being able to rebuild your credit by always paying your credit card account when it comes due, this kind of card is also great for making purchases online. This is a convenience a lot of people take for granted when they have a credit card but it's something you can enjoy with a secured card. Of course, you just need to do everything you can to remember to pay the credit card bill when it comes in, to avoid impacting your credit score in a negative way.
Alternatives to credit builder credit cards
If you've decided that now isn't the time to get a credit card or you can't get approved right now, there are a couple of popular alternatives that you could also consider. While these won't improve your credit score, they don't have an annual fee or interest rate you need to worry about. Also, both of these options can be used online to make purchases:
- Debit card. Using your bank card is a great way to limit your purchases to what funds you have available in your account rather than using credit to buy things you may not be able to afford. Debit cards are also available for use nearly everywhere that credit cards are accepted. While some online stores may not accept a debit card in place of a credit card, there are plenty of alternative options online that will support this method of payment.
- Prepaid credit card. A prepaid card is a good option for you if you want to have all of the functionality of a traditional card without the annual fee or interest rate. The other nice feature of the prepaid option is that your purchases are limited to the amount that you put on the card. This means you don't need to worry about overspending or paying back a large bill at the end of the month.
However, there are further options that will help to improve your score:
- Secured personal loan. You may not be able to qualify for an unsecured personal loan repayable by instalments, but you may be able to qualify for a secured loan. As with a credit card, you must keep up with repayments so that your good record is reported to credit bureaux.
- Credit builder loan. Some banks have specific products called credit builder loans, where you borrow money to put in a term deposit. Once you've met all the repayments, the funds are yours to keep as savings or otherwise invest. And your repayments will have played their part in repairing your credit.