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Rebuilding your credit is an important step towards financial recovery and can be a lot easier than you think. Secured credit cards are a great option for people who have no credit history or who need to repair their existing credit. Secured credit cards allow you to use a credit card, rebuild your credit and show lenders that you can be a responsible borrower.
The trustees at David Sklar & Associates can help you get back on track through credit counselling, creating a budget and introducing you to credit rebuilding tools like a secured credit card.
What’s the difference Between a Secured and Unsecured Credit Card?
A secured credit card in Canada is a card that requires you to put down a deposit. What difference does that make? First, it helps to know the difference between secured vs unsecured debt.
Secured debt is any loan that has collateral. When you take out a mortgage, and you fail to make payments, the bank can repossess your property. The same goes for auto loans, home equity lines of credit, and any loan where the lender can repossess assets if you stop paying.
By comparison, lenders do not have any right to collect collateral if you stop paying unsecured debts. They can take other legal actions, such as garnishing your wages or putting a lien on your asset. When you use a conventional credit card, you’re taking on unsecured debt. Other examples of unsecured debt include:
- Student loans
- Unpaid utility bills
- Unpaid medical expenses
- Lines of credit
- Payday loans
After filing for bankruptcy or a Consumer Proposal a lender may not want to take the risk of lending you unsecured credit or loans without some form of security. That’s why secured credit cards are the perfect tool for individuals with poor credit. A Secured credit card requires you to pay upfront and create a credit limit with your own money. This way the lender takes virtually no risk. Once you receive your new secured credit card you can continue to use it for everyday purchases and rebuild your credit in the process.
How Does a Secured Credit Card Work?
To receive a secured credit card in Canada, you must put down a deposit. This deposit (as an example $500) becomes your new credit limit. If you use your secured credit card and do not make payments towards its balance the lender can take your deposit and cancel the card.
It’s like a debit card, but unlike a debit card when you spend money on your secured credit card it helps to re-establish you credit. Like an ordinary credit card, if you carry a balance month to month, you will be charged interest and must make a minimum payment. The lender only collects your deposit if you fail to make your minimum payment.
The best way to improve your credit rating quickly is to make small monthly purchases and repay them immediately. One of the factors that impact your credit score is your credit utilization rate, which is the percentage of your credit limit you are currently using. If you owe $100 with a $500 limit, your utilization rate is 20%. Experts recommend keeping your utilization rate below 30%. For best results, use your card each month for purchases you would make anyway, but pay it off that same month before any interest charges occur.
A secured credit card is your chance to prove that you can responsibly use credit. Once you have a proven track record, you should be able to apply for a conventional, unsecured credit card. A secured credit card is also an effective way to build a credit history if you don’t have one at all and don’t qualify for options like a student credit card.
How to Find the Best Secured Credit Card for You
As you start looking at your options, remember that issuers are less concerned about your income or how much debt you owe when you apply. Secured credit card applications are more likely to be approved, so you don’t need to worry too much about how to get a secured credit card in Canada.
The important factors for you to compare will be:
- Minimum deposit
- Annual fee
- Credit limit
- APR (Annual Percentage Rate)
There are a lot of secured credit cards on the market. Ideally, when you use your secured credit card, you’re not carrying a balance. Paying your full balance every month is the best way to rebuild your credit score.
The best secured credit card would be one that has no annual fee and a minimum deposit that you can afford. Issuers typically review your payment history after six months or longer and graduate you to an unsecured card if you’ve made payments reliably. With that in mind, you may also want to look at cards issued by a bank or company you plan to have an account with long-term.
Other Ways to Improve Your Credit Score
There are numerous factors that go into how your credit score is calculated. We’ve already touched on credit utilization rate, or the amount you owe compared to your total limits, but there’s also:
- Length of credit history
- Payment history
- New accounts
- Types of accounts
#1 Length of Credit History: When you file bankruptcy or a consumer proposal, you typically do not get to keep any of your credit cards.
#2 Payment History: The single most important factor in your credit score is your payment history. Late payments, missed payments, and how late (30, 60, or 90 days) you made payments are taken into account. It also shows if any of your accounts have gone to collections or if you have filed bankruptcy or a consumer proposal.
#3 New Accounts: When you apply for or open a new account, such as a credit card, line of credit, car loan, etc., it counts against your score. This is why advisors tell you not to get new credit cards if you’re planning on applying for a mortgage in the near future. You have to use and repay these accounts for a while before they make a net positive.
#4 Types of Accounts: Having multiple types of accounts, not just credit cards, can also benefit your score. Adding car loans, lines of credit, or a mortgage into the mix can have a positive impact on your score, as long as you are making regular payments and keeping your utilization rate low.
How to Keep Your Credit Rating High
It can be a long struggle to repair your credit score. Once you have a good score, you want to make sure it stays that way. Use these tips to protect your credit rating, improving your chances of qualifying for future loans at better rates:
#1 Check Your Credit Report: Your credit report is collected by two reporting agencies in Canada, TransUnion and Equifax. In the past, both agencies allowed you to check your credit report by mail for free and check it online for a fee. Starting in 2021, Equifax now allows Canadians to check their report online for free, so it’s easier than ever.
#2 Don’t Co-sign: Co-signing on a loan for someone else puts your financial record in someone else’s hands. It’s a big risk if you co-sign on a loan or even an apartment.
#3 Don’t Apply for Credit You Don’t Need: New credit hurts your score, so it doesn’t make sense to apply for a new account unless you need it. Once you’re able to qualify for an unsecured credit card, it’s a great move to make, but adding multiple cards may not be a good idea.
Rebuilding your credit rating all starts with getting out of debt. If you’re struggling with credit card debt in Ontario, Licensed Insolvency Trustees at David Sklar & Associates can tell you where to begin. Depending on your finances, there may be several options available to you, not just insolvency. Find out what you can do to get out of debt today.