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Credit card options for applicants with bad credit
Looking to apply for a credit card but have a bad credit score? Here's what you need to know.
While it is possible to get a credit card in Canada with bad credit, your options will be limited and you’ll have a difficult time finding cards with favourable interest rates or fees. While a bad credit score can have a negative impact on your chances of getting approved for a card – or being approved for a card with affordable rates and fees – working to improve your credit rating can help increase your chances of approval in the future.
What credit products can I get with bad credit?
If you can’t get approved for a credit card with reasonable rates, you might need to consider some of the following options:.
- Debit cards. A good way to avoid debt is to steer clear from credit and only spend what you have. Debit cards are debt-proof and widely accepted as payment. However, keep in mind that using a debit card will have zero effect on your credit report and cannot help you rebuild your credit rating.
- Prepaid credit cards. Prepaid cards are similar to debit cards in the sense that you’re spending only what you have. Unlike a debit or credit card though, you load funds on the card before using it. These cards also don’t affect your credit rating and don’t charge interest, so they can be a good way to build up your budgeting skills. Most prepaid cards are either Visa or Mastercard, so you should be able to use them in the same places you’d use your credit or debit card.
- Short-term loans. Also known as a payday loan, this is a loan of up to $3,000 that is usually repaid within 14 days to one year, but usually terms are around one to three months. Keep in mind these loans come with excruciatingly high interest rates and fees, so really consider how much you need it before you apply.
- Bad credit personal loans. If you’re in need of a larger amount than a short-term loan, there are some bad credit personal loans available that can offer amounts up to $5,000 or even $10,000. These loans usually come with a flat interest rate and, if you repay responsibly, can help you rebuild your creditworthiness.
Secured credit cards
How does a secured credit card help you rebuild credit?
A secured card does not automatically improve your credit score. To raise your credit score using a secured credit card, you’ll need to:
- Pay off your balances every month. Secured credit cards report to credit bureaus just like unsecured cards, which means you’ll have a better chance at improving your credit score if you pay off your balance in full each month.
- Stay within a budget. Credit cards are not free money. Since you’re looking to build your credit, you’ll want to pay off your balances in full each month – so you should only spend what you can actually afford.
- Use your card regularly. Credit bureaus look for activity on a card every month, so if you charge a small amount and pay it off each month, you’re likely to improve your credit score over time.
- If you can’t avoid carrying a balance, keep it small. Sometimes you need to put more on your card than you can afford to pay off at once. Credit bureaus look at your debt-to-income ratio, and it’s recommended that you keep this ratio below 30%. This means if you have a card with a $500 limit, try to keep your balance below $150.
Debit cards vs. secured credit cards
Debit cards and secured credit cards both require you to deposit cash in a bank account in order to spend money. However, secured cards do two things that debit cards don’t:
- Debit cards don’t report to credit bureaus, and therefore don’t help build your credit.
- Debit cards only let you use money from your bank account. Secured cards allow you to “graduate” to either partially unsecured credit cards — cards that allow you to spend a bit more than you’ve deposited — or fully unsecured credit cards that don’t require a deposit at all.
Credit scores explained
Your credit score is a numerical representation of the information on your credit report and helps determine your borrowing power when it comes to applying for credit. There are two credit bureaus in Canada: Equifax and TransUnion. Your credit score may vary slightly between the two bureaus since their algorithms differ slightly.
Generally, credit scores are broken down as follows:
- Excellent credit score: 760-900
- Very good credit score: 725-759
- Good credit score: 660-724
- Fair credit score: 560-659
- Poor credit score: 300-559
Alternative options for borrowers with bad credit
Bottom line
Ultimately, a bad credit rating can have a big impact on your financial options, making it difficult to get a credit card, car loan, home loan or other forms of credit. Instead of looking for “bad credit” credit cards or options that involve no credit check, you can improve your chances of approval by rebuilding your credit rating and managing money responsibly.
Start by requesting a free copy of your credit report via one of the credit bureaus or online using a trustworthy credit reporting site. Once you receive a copy of your report, identify the negative listings on your file and begin to take steps to improve your credit score.
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