Credit can be a powerful financial tool if used effectively, but it can stir up problems if you don’t know how to manage it properly. Earning a good credit score can help you build wealth and allow you to do business with others.
You can apply for a loan for a car or a house using your credit score, based on the promise to pay back later. Almost all financial transactions are dependent on a solid credit score. If you mismanage your credit and earn a poor credit score, you’ll be less likely to qualify for loans or end up with a loan with a high interest rate and poor terms and conditions.
How Do You End Up with Bad Credit?
A FICO score of less than 600 is considered bad credit. Unpaid medical debts, balances on utility accounts, late payments on a credit card, declaring bankruptcy, having a tax lien, getting your car repossessed, and real estate foreclosures all negatively affect your overall credit score.
Steps to Rebuilding Your Credit
1. Get a New Credit Card
Rebuilding credit can be a long and arduous process, but it’s not impossible. Customers should consider getting a new credit card if they’re attempting to rebuild their credit score.
2. Look for Credit Cards with Low Interest Rates
There are dozens of credit cards in Canada to choose from, but if you have a low credit score, there are certain features you should prioritize. Look for a credit card with a low interest rate. Most credit cards have an interest rate of 19.99% or higher, but some have lower interest rates closer to 10% or 15%. Having a lower interest rate will help if you are carrying a balance on your credit card. You should still make your minimum payment if you can’t pay off your balance each month, this will protect your credit score and avoid interest penalties.
3. Look for a Credit Card with a Low Deposit
All secured credit cards require a deposit to secure your loan. The deposit can range from one to two times the credit limit. Your lender will hold this deposit until your credit card is cancelled. A credit card with a lower deposit requirement allows you to have more access to your funds to complete other transactions.
4. Never Miss a Payment
Payment history is one of the most important factors in rebuilding credit. Making on time payments accounts for 35% of your credit score. Missed payments can affect credit history for a long time, but making regular payments on a new credit card can help you boost your score quickly. Customers are urged to set reminders or use automatic payments to ensure credit card bills are paid on time.
5. Keep Credit Utilization Low
Credit utilization, the percentage of your available credit that you’ve borrowed, is another important component of rebuilding credit. It accounts for 30% of one’s total credit score. The less credit customers use the better their credit score will be. It is advised that customers pay their balances off in full each month to keep credit utilization low.
6. Don’t Apply with Different Lenders
It is important to keep old credit accounts open to make your credit history longer. Do not apply for credit with lots of different lenders. This is known as a hard inquiry and can siginificantly decrease your credit score.
What Is A Secured Credit Card?
If you have a low credit score or a bad payment history, you may not be able to get a regular, unsecured credit card, but you may qualify for a guaranteed card.
A guaranteed credit card is a card that nearly everyone gets approved for. There aren’t any credit cards that approve 100% of applicants, but there are credit cards marketed towards people with poor credit scores. Some companies offer pre-qualification questionnaires, so customers can find out whether they’re likely to be approved without undergoing a credit check.
Secured credit cards require a cash security deposit to activate. This type of card lessens the risk of a customer defaulting on the payments to the issuing bank. In most cases, the security deposit is equal to the credit limit. Deposits usually start at $200, but some can go as high as $1,000 or more. Customers will get their deposit back when they close their account, as long as they’ve paid off the balance in full.
Top 10 Credit Cards for Bad Credit in Canada
1. Capital One Guaranteed Credit Card
The Capital One Guaranteed credit card is the perfect jumping off point for customers looking to establish credit or rebuild their poor credit score. To be approved for this card customers need to be of adult age in their province or territory, haven’t had a Capital One account in bad standing within the last year, don’t currently have a Capital One card and haven’t applied for a Capital One card more than once in the last month.
For this particular credit card, the credit limit ranges from $300 to $7,000. This card carries an APR of 19.8% and an annual fee of $59. Capital One reports your credit card activity to credit reporting agencies every month, so it’s important to make regular payments and keep your balance low to improve your credit score quickly.
2. American Express Essential
The American Express Essential card isn’t a secured credit card, so customers aren’t required to submit a security deposit with their application. This card carries no annual fee and features a 6-month introductory interest rate of 1.99% on balance transfers. The American Express Essential card has a low interest rate of 8.99% on purchases and cash advances. To apply for this card you must be a current resident of Canada and have an income of at least $15,000 per year. This is a good ‘next-step’ card for users who’ve already improved their credit score using a secured credit card.
3. Refresh Financial Guaranteed Credit Card
Refresh Financial offers a secured credit card with guaranteed approval for anyone with a bank account, a minimum monthly income, and a Canadian ID. You do not need to complete a credit check when applying. Credit limits can range from $200 to $10,000, depending on the amount of the security deposit. The card’s APR is 17.99%, and users will only pay a fee of $12.95 a year.
4. BMO Secured Credit Card
The BMO prepaid credit card is ideal for customers who are establishing or rebuilding their credit. The BMO secured credit card is a reloadable Mastercard that requires a security deposit ranging from $100 to $10,000. The security deposit is equal to one’s credit line. The annual fee for this credit card is only $6.95, and there is no interest rate on purchases. The online application only takes a few minutes and customers will find out if they are improved almost immediately.
5. First National Bank Platinum Edition Visa Card
You must submit your income, bank account information, social security number, and address when applying for the First National Bank Platinum Edition Visa. This card is a good choice for those with bad credit because it offers fraud protection and users do not have to pay an annual fee. If the card is lost or stolen, customers are not held liable for the charges if they report the loss or theft within 24 hours. This credit card also comes with benefits like the ability to check your FICO score every month at no charge, auto rental insurance, and a $25 statement balance credit when you make a purchase during each of the first three billing cycles.
6. Fingerhut Unsecured Card
The Fingerhut Unsecured Card is the perfect choice for those with a bad credit history. This card carries no annual fee and your interest rate varies based on your credit score. Customers also do not have to pay an application fee in order to see if they are eligible for this credit card. Cardholders can enroll in the Payment Rewards program to earn 10% back on payments made to this account, and those rewards can be used for Fingerhut purchases.
7. Home Trust Secured Credit Card
The Home Trust Secured credit card has a 95% approval rate, but those in bankruptcy will not be approved. Home Trust requires users to send in a security deposit along with their application. Customers can expect to pay a security deposit of $500 to $10,000. Users can increase their credit line with an additional deposit at any time. The card’s APR is 19.99% with no annual fee or 14.9% with a $59 annual fee.
8. Capital One Secured MasterCard
The Capital One Secured MasterCard is a great choice for customers with a poor credit score or a short credit history. The security deposit for this card is either $49, $99, or $200. The exact amount of the deposit depends on a user’s credit history and score. This card has an APR of 24.99% and users will not have to pay an annual fee.
The available credit line matches your initial credit line, the minimum deposit is $200. Customers will have access to a higher credit line if they make their first five monthly payments on time. Users get to choose the day of the month that the payment is due and the form of payment to use.
9. Store Credit Cards
One type of credit card that can be easy to be approved for, even if you have a lower credit score, is a store credit card. For those who don’t want their money tied up in a security deposit, or who are looking for something that will give them valuable rewards and even a little insurance, a store card could be a good option.
Stores like Walmart, President’s Choice and Canadian Tire tend to have high approval ratings.
Store credit cards could be a great place to start if your credit score isn’t horrible, but you have your doubts of getting approved by most banks.
10. MBNA True Line Mastercard
A good balance transfer credit card is a good option for customers who have pre-existing debt, and the MBNA True Line Mastercard is an ideal choice. This card carries no annual fee and will give you 0% interest on balance transfers for the first 6 months. You will only be charged 12.99% after that. This is a great option for those looking to take control of their credit card debt and improve their credit score fast.