As the saying goes, past behaviour is the best indicator of future behaviour. And in that spirit, your credit history is what lenders use to determine your credit worthiness. In other words, they use your past financial history to judge how likely you’re able to repay your debts in full and on time.
If you have a poor credit history or no credit at all, then lenders either don’t trust that you’ll be timely and consistent in your repayments, or they have nothing with which to assess your risk—and lenders aren’t about to give you the benefit of the doubt. That being said, it is worth checking your credit score as it might be higher than you think.
So, how do you go about building (or rebuilding) your credit history? There are lots of credit cards for bad credit, most of them being secured credit cards. Secured credit cards differ from other credit cards in that they require you to provide a security deposit that’s equal to or greater than the credit limit.
To see how cards fit with your individual spending profile, compare multiple cards side-by-side with our credit card calculator.
Ratehub.ca’s best credit cards for bad credit in Canada
- Best secured card: Home Trust Secured Annual Fee Visa Card
- Best no-fee secured card: Home Trust Secured Visa Card
- Best low interest credit card: American Express Essential Credit Card
Best secured card
If you don’t qualify for an unsecured credit card, then the Home Trust Secured Annual Fee Visa Card might be a good option for you. This card requires you to pay a security deposit equal to the amount of the credit limit you’d like. You can put down as little as $500 and as much as $10,000. This provides you with the opportunity to build your credit rating up at a rate that you’re comfortable with. If you want to use the card for small purchases to slowly regain creditors’ trust but you still want the freedom to buy those bigger ticket items, this card lets you do just that.
This card is available to all Canadian residents except residents of Quebec, and has an approval rating of more than 95%, so you’re almost guaranteed to be able to get one—even if you’ve been bankrupt in the past (so long as you’ve been discharged). The card has an annual fee of $59, which you can choose to pay at $5 per month. It comes with a low interest rate of 14.9% on all purchases (19.8% for cash advances), which makes it a good choice for those looking to re-establish their credit rating and who trust themselves to not often carry a balance. Since this isn’t a prepaid card, you can’t use your security deposit to pay off your balance, but once you close your account it will be returned to you in full.
Best no-fee secured card
If you rather not pay an annual fee, the Home Trust Secured Visa Card might be a good option. The primary difference between the two cards is the no-fee card comes with a higher interest rate (19.99%) for purchases and cash advances.
Best low interest credit card
It is worth knowing your credit score before applying for a new card (especially if you’ve never checked!) as it might be higher than you thought. If you have a credit score above 600, it is possible that you might qualify for a low-interest credit card and may not need a secured credit card to (re)build your credit.
The American Express Essential isn’t a secured credit card, so it doesn’t require you to put down a security deposit that acts as your credit limit. With a 6-month introductory interest rate of 1.99% on balance transfers, this card is by one of the most effective ways to pay off any outstanding credit card balances.
The American Express Essential is an excellent choice for Canadians looking for a low-interest credit card that extends that low interest rate to cash advances and balance transfers. With this credit card you’ll pay 8.99% interest on all purchases and cash advances, and for the first six months you’ll pay just 1.99% on balance transfers, and 8.99% after that. These low interest rates will cost you no annual fee.
To apply for this credit card you’ll need an income of at least $15,000 per year, and you must be a resident of Canada. This is a good card to graduate to once you’ve improved your credit score using a secured credit card and proved you can be relied on to pay off your credit card balance on time every month. If you think you’ll occasionally carry a balance on your credit card from month to month, the best low interest credit cards are the way to go.
The difference between secured and unsecured credit cards
We mentioned secured and unsecured credit cards above, now let’s talk about the difference between them. An unsecured credit card is a typical credit card where you apply for the credit card, and the lender uses your income, your credit score, and several other factors to determine your credit limit. There is no collateral for this credit card, and you pay off your purchases each month.
If you have a low credit score, no credit score, or you’ve been discharged from bankruptcy, you may not qualify for an unsecured credit card. Instead, you can choose a secured credit card.
A secured credit card is guaranteed by a cash deposit – usually one or two times the amount of your credit limit. This deposit secures your loan with your lender. Your lender will hold this deposit as long as you have your secured credit card.
You can use your secured credit card just like an unsecured credit card. You can shop online, book travel, and use it for your daily spending. Also just like an unsecured credit card, you should aim to pay off the balance in full every month.
What to look for in unsecured and secured credit cards
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. First, 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%. A lower interest rate help if you need to carry a balance. Even if you can’t pay off your balance in full, you should still make your minimum monthly payment, which will preserve your credit score and avoid any interest penalties.
The second factor to consider is the 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 holds this deposit until you cancel your credit card. A credit card with a lower deposit requirement frees up more of your more to go towards your financial goals like savings or debt repayment.
Finally, most secured credit cards require you to pay a setup fee, usually around 3% of the balance. You don’t get this fee back, and depending on your credit limit, this amount can be steep. For example, if you are applying for a $3,000 credit card and the setup fee is 3%, you’ll have to pay $90.
Unsecured credit cards don’t require a deposit or setup fee, but if you have a bad credit score, you won’t qualify.
What is a bad credit score?
Your credit score is a number used by lenders to determine your trustworthiness as a borrower. It’s a number between 300 – 900, and the higher the score, the better. Many factors go into determining your credit score such the age of your oldest credit account, your payment history, the types and size of credit you have, and whether your credit products are often close to their limits.
Most credit card providers require a credit score of at least 600 to qualify for an unsecured credit card, but if your credit score is below that threshold, don’t worry, you can improve it.
How to improve your credit score?
If your credit score is too low to qualify for an unsecured credit card, here are the ways you can improve your credit score:
- Apply for a secured credit card and never miss a payment
- Make all of your payments for services like cell phones and electricity bills
- Pay down the balances on any revolving credit agreements to less than 30% of the credit limit
- Keep old credit accounts open to make your credit history longer
- Do not apply for credit with many different lenders – this is called a hard inquiry and can decrease your credit score
Ultimately, improving your credit score comes down to demonstrating that you are trustworthy with credit, which means paying off your existing credit tools every month. If you do this, eventually your credit score will improve enough that you will qualify for an unsecured credit card.
- The Best Credit Cards in Canada for 2018
- How To Use a Credit Card to Rebuild Bad Credit
- 3 Ways to Pay Off High-Interest Credit Card Debt