I have poor credit: what are my credit card options?
If your credit score isn’t where you’d like it to be, you may run into troubles getting approved for things from credit cards to mortgages. A poor credit score can even affect how hard it is for you to rent an apartment. So what can you do?
On this blog, I’ve always said that the best way to improve your credit score is to make payments on time and in full. While that’s still true, it can be hard to make on time payments in full if no one is even willing to give you a credit card, mortgage, personal loan, or the time of day. Why worry about having too many credit cards when you can’t even get one?
Thankfully, there are still ways to build credit, even if you’re starting from zero (or 300). Here are some of the ways to improve your credit score if it’s already bad.
If you have poor credit, you probably already know the dangers of credit cards. High-interest charges, late fees, missed payment fees, collection calls – those are all great reasons to avoid credit cards.
But you should still get one.
The reality is that credit cards are a tool, and are only as dangerous as you let them be. Just like a chain saw can be used in a constructive way or as a prop for a grisly horror movie, credit cards can help your credit just as easily as they can hurt it, even without you realizing.
Strictly speaking, you don’t need to use credit. You can get by with renting a home, buying used cars that you saved up for, spending cash or debit, and building an emergency fund so you don’t have to rely on credit if something unexpected happens. Sometimes those things are actually preferable to the credit alternative.
But that doesn’t unlock your full financial potential. What if you want to move to a smaller town without a rental market? What if you want to renovate your living space? What if you want to have credit card purchase protection and fraud coverage? What if the emergency costs more than you were prepared for?
In reality, it’s hard to live totally without credit, just like it’s hard to live totally without a cell phone. Many people do it, but there are tangible benefits to having one despite the downsides.
It’s no surprise that the majority of Canadians own their home, or plan on buying their first home soon. Canadians are in love with the idea of owning their home, even as prices and mortgage rates rise.
If you’re one of the many Canadians that are or want to be a homeowner, you’ll almost definitely need a mortgage. Very few people have the kind of money saved up to buy a home entirely in cash – and when you do get a mortgage, you’ll want the lowest mortgage rates.
Higher credit scores have lower interest rates. Improving your credit score will literally save you thousands of dollars if you ever decide to buy a home – why wouldn’t you want to do that?
Ok, so you don’t want to buy a home. You think that Canadian real estate is too expensive (and I don’t blame you) and you’re going to sit it out by renting. Since you don’t need a mortgage, your credit is irrelevant, right?
Wrong (somewhat). Many landlords are actually just normal people trying to make a bit of extra money on the side by leveraging assets (i.e. remortgaging their primary residence). They aren’t faceless corporations that just have a box in a wall somewhere, although I’m sure that some are. And you know what? Even if they are, landlords care most about your ability to repay them. And how are they going to know if you’re likely to repay them? By checking your credit. So your credit can affect renting.
In Canada, landlords are allowed to request a credit report before agreeing to rent their property to you. Good credit means that you can handle your finances well – that’s good news for the landlord. Bad credit means you missed payments in the past, might have financial hardships that would impact your ability to repay your landlord, or are just unlikely to repay them – bad news. In hot rental markets like Toronto, remember that you’re competing with other possible tenants. Why would the landlord choose someone with poor credit over someone with good credit?
If someone steals your wallet, what should you do?
A: Give an upset sigh, call your credit card issuer to freeze your stolen card, then return to your home or office and pick up your spare credit card that you left behind for just such an occasion.
B: Run around screaming and flailing your arms because the thieves not only got your ID, all your credit cards and your favourite wallet, but also several hundred dollars in cash.
Cash is a liability. It’s useful to have a little bit on hand for small purchases or repaying someone (even though you can do online transfers painlessly nowadays with your chequing account). Canada is a world leader when it comes to cashless societies, so it’s not like you’ll run into too many cases where you’ll actually need a couple hundreds, or a fistful of twenties.
If someone steals your cash, it’s gone. Unless you wrote down each serial number on a bill, even if they found they guy who stole your wallet the cash may already be lost. If someone steals your credit cards, all they’ve stolen is a payment method. If you’re quick, you can cancel the cards and not worry about them being able to spend it, but if you only notice after strange charges start appearing on your bill, you’re still in luck. Card issuers will refund any fraudulent purchases, which include when someone physically or digitally steals your card.
You need to spend money to make money. But what if you want to make money, but have no money? It can be hard or impossible to fund large projects like a home renovation or starting a business without a loan. And if you have no credit, it can be hard or impossible to get a loan!
Even if you’ve done everything right, the universe can find a way to ruin your life. You can have $10,000 saved up and have your roof collapse the same week as your significant other rear ends you at a stoplight on the way back from your dog’s cancer surgery. Plus your kid needs braces and your condo asked for a special assessment. Suddenly that $10,000, which seemed like a lot, isn’t enough to cover all your emergencies.
Having available credit is a last resort to your last resort. It’s better and easier to apply for credit before you need it, rather than after. You’ll get better interest rates and limits and won’t have to rely on shady payday loans or loan sharks.
Almost every credit card in Canada is unsecured. That means that there is no physical property that the credit card company can take in case you default on your payments. Examples of secured loans are car loans and mortgages – if you don’t pay those, the company can take back the car or the house.
If you’re not creditworthy, it can be difficult to get an unsecured product because the lenders don’t trust you to pay your bills. They don’t know you personally, so the only measure they have of your habits is your credit score. They’ll be much more willing to give you a card if you give them a guarantee that they’ll get their money back, though. And I don’t mean a pinky swear.
A secured credit card requires a cash deposit before it can be used. The bank holds on to this cash deposit and gives you a limit of $1:$1. The more you put down, the higher your limit will be. The advantage for the customer is that it is very easy to get approved (approvals are guaranteed).
The bank will typically only use the security deposit to cover the bill if the cardholder is more than 150 days late – but this varies from lender to lender. Be sure to read your cardholder agreement, and to pay your bills on time.
A secured card works in exactly the same way as any other Canadian credit card. You can spend up to your limit, then you get a bill in the mail (or online) that you have to pay off. While secured credit cards don’t have rewards, they’re a great stepping stone to better cards that do.
Many secured credit cards also carry a small annual fee. This does not go towards increasing your limit, and, unlike the deposit, won’t be refunded when you decide to close your card.
Yes. The security deposit is only used in extreme cases. The bank will first charge interest on your outstanding balance and wait for you to pay before they dip into your security deposit.
You only get a secured credit card when you need to improve your credit score, and you may be wondering if it’s better to carry a balance on your card. Short answer: no. Carrying a balance month-to-month is not better than paying off your balance in full. Using a secured credit card responsibly is not only good practice for when you graduate to an unsecured card, but will improve your score without any shenanigans. Just pay on time.
Refresh Financial Secured Visa Stats
Annual fee: $12.95
Minimum Deposit required: $200
Interest Rate: 17.99%
No credit check required
What makes the Refresh Financial credit card so interesting is that it doesn’t require a credit check to be approved. If your credit is poor, then this can be a lifesaver. Since there is no credit check, you can’t be denied. They also have a smaller necessary deposit of $200. While that means you won’t be able to spend much on your card, you also don’t have to pay as much up front to begin building credit.
A prepaid credit card is different than a secured credit card, despite the similarity that you have to pay up front to use it. A secured credit card can be used exactly like a normal credit card, but a prepaid credit card works more like a debit card.
A prepaid card is loaded with funds first, and as you use the card the funds are automatically taken off the card. Since funds are automatically deducted, you won’t have a monthly payment. Unlike a bank account, which can go into overdraft (and charge you a fee), a prepaid card cannot use more funds than it has available.
Prepaid cards do not report to credit bureaus, because you’re not borrowing any money. You have to provide all the money first before you can spend anything. While a secured card requires an initial deposit, you can borrow money every month without making an additional deposit.
The benefit of a prepaid card is that, like the Refresh Financial Visa, they have no credit checks – because they’re not a credit product. But that is also their biggest flaw. If you want to improve your score, a prepaid card won’t help you.
If you don’t want a credit card, either because you despise the idea or because you have trouble controlling your spending, a prepaid credit card can be a great tool. But it won’t help you build credit.
Because all prepaid cards function the same way and lack rewards, there isn’t much difference between them. However, the AC Conversion card is the best card because of the ability to load different currencies other than Canadian dollars. This avoids the 2.5% foreign transaction fee that plagues most Canadian credit cards since your spending that foreign currency directly. It also comes with an app so you can manage your money directly from your phone. You can even get one free international ATM withdrawal per month!
A guaranteed credit card is just that: guaranteed. Unlike a secured credit card which requires a deposit, a guaranteed credit card is totally unsecured.
There is currently only one guaranteed unsecured credit card in Canada, the Capital One Guaranteed MasterCard.
Despite the name, you actually aren’t 100% guaranteed for approval. You have to meet four criteria first:
1. Be the age of majority in your province or territory
2. You haven’t applied for a Capital One account more than once in the last 30 days
3. You don’t have an existing Capital One account or a pending application
4. You haven’t had a Capital One account that was in poor standing in the last year
That means that you probably won’t run into trouble applying for this card so long as you aren’t already, or have been, a Capital One customer.
Even if you’re denied for this card, you can still be approved for their Guaranteed Secured MasterCard. Both cards have a $59 annual fee and an interest rate of 19.80%.
When you’re trying to improve your credit, it’s important to keep on top of changes in your score. If you don’t know how your credit is changing every month, you’ll have no sense of your progress. With Credit+, you’ll get access to monthly reports from TransUnion and instant alerts to any changes sent straight to your phone or email.
Rebuilding your credit be a long and hard process, but the payoff is definitely worth it!