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Compare credit building credit cards in Canada
Having bad or limited credit history doesn't necessarily mean credit cards are off the table. These credit cards can help you rebuild your credit history
Credit building credit cards can help you build or restore your credit history while you spend. You can expect lower opening credit limits, nominal interest rates, fewer, if any, reward programs in exchange for more lenient eligibility criteria.
After all, your credit score and history are the main factors that determine whether you get approved for credit or financing products and they can dictate the terms you’re offered. Having bad credit or no credit history can reduce your chances of getting approved for things like a mortgage, car financing or a credit card. Learn more and compare credit building credit cards in Canada in our guide below.
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What is a credit builder card?
A credit builder card (or credit building credit card) is a credit card that’s specifically designed for people who have low credit scores or no credit history and who might struggle to get approval for financing through mainstream channels. These cards are also seen as entry-level credit products and a stepping stone to credit products with better rates.
If you’ve never borrowed or taken out a loan (perhaps if you’re a student or new to the country), your credit record is likely to be non-existent and it can be difficult to get approval on a card or loan application. If you don’t have any credit history for lenders to analyze they don’t know if they can take the risk in issuing you credit. In this situation, a credit builder credit card will help you build a credit history from scratch.
How are credit builders different to other cards?
Along with offering an APR between 12.99% and 19.99%, the features of a credit builder credit card will be similar to that of a standard credit card, but with some key differences:
- Lower credit limits. Your card’s credit limit is the maximum balance amount you’re allowed to be in debt on your credit card at any one time. This limit will be offered by the card issuer and will be dependent on factors like your income and credit score. For secured credit cards that don’t require a credit check, the credit limit may be based on the amount of your security deposit. This can range between $300 – $10,000. The good news is that it’s often possible to have your credit limit reviewed within a few months of responsible card use (staying within your limit and making repayments on time).
- Low or no annual fees. Credit builder cards usually offer a low, flat annual fee ranging from $12.95 – $79. Some cards even offer a $0 annual fee.
- Fewer frills. Typically, a credit builder card won’t come with much in the way of rewards or perks. Since the main purpose of these cards is to build up your credit score, they aren’t complicated products. Some providers do offer rewards like 1% cash back on certain purchases or a basic rewards point scheme, but this isn’t always the case.
- Tools to help you build your credit. Card issuers want you to make your payments on time and if they offer a range of cards they might expect you to move across to a different card as your credit score improves. To help you along this journey, your credit builder card might come with features like access to your credit record, text or email alerts when a payment is due or when you’re close to your limit, an app to manage your account while on the go and/or specialized information and advice.
What is an APR?
An APR (Annual Percentage Rate) is the price you pay for borrowing money for the duration of one year. You can avoid paying an APR if you pay your credit card bill on time. APR rates in Canada vary greatly, from 0% to 36%, or sometimes higher. The average APR in Canada is 22.9%.
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What is the easiest credit card to get with poor credit?
There are a few credit builder cards that advertise guaranteed approval. This means that the providers don’t require a credit check and if you meet basic criteria your chances of approval are high regardless of your credit standing. The basic criteria can include you (the applicant) being the age of majority in the province you reside, you don’t have a pre-existing application with the provider, and you didn’t have an account in bad standing with the provider within the past year.
It’s still worth noting that not everyone gets approved even with “guaranteed approval”. Most providers offer secured versions of their cards (which require a deposit) as an alternative if you get denied for their unsecured version. All cards are subject to terms and conditions set by the provider.
For more, read our guide on minimum credit score for credit card approval in Canada.
How should I compare credit building credit cards?
Using a credit builder credit card to improve your credit score is a serious decision. To make sure you are choosing the right option for you, there are a few aspects to consider.
- How much is it going to cost you? If you pay off your balance in full each month and use your card responsibly (stay within your limit, don’t use the card to withdraw cash), you should be able to avoid paying any interest thanks to the grace period on purchases that almost all cards offer. Otherwise, you would only pay your card’s annual fee if it has one.
- Are you eligible? Check the card’s eligibility requirements before you apply. The last thing you want to do is to keep applying for cards and keep getting rejected. This will damage your credit score further and will make it even more difficult to get credit in the future. Thankfully, most issuers offer an “eligibility checker” that you can use to get an indication of how likely you are to get approved before applying. Using this checker won’t affect your credit score and can help you compare credit cards by eliminating options that you’re not eligible for.
- Will it help you stay on top of your finances? A good credit builder card should make it easy for you to track and manage your account and manage repayments. That might mean a decent mobile app, text alerts or even visibility of your credit record.
- Are there any perks? Rewards on credit builder credit cards aren’t common, but in some instances the issuer might include basic benefits such as 1% cashback on purchases. Just be wary of building up debt through chasing rewards – you’ll almost certainly end up paying more in interest than you earn in rewards.
Are credit builder credit cards a good idea?
Pros
- Build your credit score. The main benefit of this type of card is the ability to get access to credit despite your credit history and to help you restore or build your credit score while making responsible purchases.
- Enjoy other standard benefits of credit card ownership. Having a credit card when travelling is much safer than carrying around cash and is often required for certain services like renting a car. It also provides protection when lost or stolen as you can easily cancel it to prevent fraudulent transactions.
Cons
- Lower credit limits. If you’re approved for a credit builder, you’re likely to start off with a lower credit limit. These limits are sometimes tailored to the individual, but can be reviewed with the issuer periodically.
- Limited rewards. Although some providers do offer 0% purchase periods or 1% cash back rewards, you are unlikely to get more lucrative rewards like air miles or perks like complimentary travel insurance.
What should I watch out for?
- Never miss your minimum repayments. This will result in additional fees and charges and damage your credit score even further. It’s always better to repay the full amount every month to prove to lenders you can effectively manage your debt.
- Avoid withdrawing cash. Cash withdrawals – also known as cash advances – on any credit card are expensive. The rates on credit builder credit cards are likely to be even higher. If you regularly withdraw cash from your credit card it might signal to card providers that you are cash strapped and they could refuse you credit going forward.
- If you are rejected, wait before applying for another card. Every time you get rejected for a credit card application, your credit score is impacted. It’s best to take a step back and find out why you were rejected before continuing.
You’ll want to make sure that the credit card you apply for reports to the 2 major credit bureaus in order to build your credit history.
How do credit cards affect my credit report?
Credit cards are a valuable tool for building credit history because they add key details that can impact your credit report, including:
- The type of account. Revolving debts like credit cards are generally considered very important accounts to have listed on your credit history because it shows lenders your ability to manage a line of credit.
- Credit limit. When you get a credit card, your credit limit is also listed on your credit report. These details help lenders see how much credit is currently available to you when reviewing your application.
- Monthly payment history. Details of if you pay your credit card balance on time, late or not at all give lenders an idea of your financial management skills. Your payment history also show negative information, like if your account has been sent to collections.
- Duration of account. Because the length of your credit history is one of the factors that goes in to calculating your credit score, the date you opened or closed any account is listed. You can also see the most recent date that the lender has reported your activity to the credit bureaus.
How can I use a credit card to improve my credit score?
Over time, these positive credit habits could be reflected in your credit report and help you get a better chance of approval in the future:
- Only apply for one card at a time. Having too many credit card applications can hurt your credit score, so make sure you compare credit cards and then apply for the one that best suits your needs at the time.
- Make payments on time. Paying your credit card balance on time or before the due date shows lenders you’re responsible with your accounts. To ensure you make payments on time, set up an autopay that draws funds from your bank account.
- Pay your balance in full every month. Paying your complete credit card balance each month reduces the risk of serious debt and lets you avoid paying any extra interest. Consider a simple, no-frills credit card to help curb your spending in pursuit of rewards.
- Increase your credit limit. If you get a pay raise at work or your financial circumstances improve in some other way, asking for a higher limit for your credit card can lower your credit utilization ratio.
- Keep balances low. Lenders report your account balance monthly to the credit bureaus. Since the amount of debt you have accounts for 30% of your credit score, the lower your balance, the better your credit score.
- Regularly review your credit card details. Taking time to go over your account can help you see how well you’re managing your credit card. It will also help you decide whether or not you want to increase your credit limit, upgrade the account or even apply for another credit card.
- Don’t close your account. You might think that if you’re not planning on using a credit card anymore, that you should close the account, however, this could have a negative impact on your credit score if it’s an old account. The length of your credit history makes up about 15% of your score, so keep that account open and active.
Tips for using a credit card effectively
When using your credit card to build your credit history, you’ve got to be smart with how you’re spending. Here are a few common tips that can keep your account balances under control:
- Create a budget. This is one of the first things you should do once you get a credit card in your hands. Even if you’re approved for a credit limit of $5,000 or more, you certainly shouldn’t be spending that much a month. Calculate all of your monthly expenses to see how much wiggle room you have in your budget to put towards a monthly credit card payment — don’t spend more than that amount.
- Use it like you’d use a debit card. It’s easy to get carried away when spending with a credit card because the balance isn’t directly reflected on your bank account statement. You’ve got to keep in mind that though you don’t owe the money back that very second, you’ll have to pay the debt eventually. And if you can’t pay the balance in full, you’ll likely pay extra in interest.
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