Okay, so you’ve got bad credit and you know it. You’ve made some mistakes in the past, but you’re ready to move on from them. The question is, how do you improve your credit score when your credit card applications keep getting declined due to your past payment history?
Well, that’s where a secured or guaranteed credit card comes into play. Secured credit cards require a security deposit which acts as collateral so lenders don’t need to worry about you missing payments; whereas guaranteed cards, don’t need a deposit, but you’ll likely have a lower credit limit.
It’ll likely take 12 – 18 months to return to good standing, but both of these types of cards are perfect for those who want to rebuild their credit.
The disadvantages of secured credit cards
Coming up with the security deposit is likely the hardest thing for those applying for a secured credit card. You also need to factor in the possibility of an annual fee for the card and it’s likely that your credit limit won’t be very high.
It may seem silly that you need to put down money to use a credit card, but it’s all about building trust. By putting down some of your cash, you’re showing lenders that you’re now in control of your finances. In return, all of your payments get reported to the credit bureaus which in turn means that your credit score will slowly go up – assuming you’re making your payments on time that is…
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Since secured credit cards aren’t like prepaid credit cards, you cannot use your security deposit to pay your monthly balance. Your security deposit is locked up as long as you hold the card so you need to manage your cash flow properly to ensure you’re paying your bills on time. Don’t worry, these funds are returned to you when you cancel your credit card and you’ve paid off any remaining balance.
If you’re ready to improve your credit score, consider one of the following best credit cards in Canada for people with bad credit.Refresh Financial Secured Card
No credit check required
$12.95 annual fee
17.99% annual interest rate
Monthly credit bureau reporting to build credit
$200 - $10,000 credit limit
Refresh Financial's Secured Card is a great option for some with a low credit score or no credit history at all. With no credit check required, your chances of getting approved are quite high compared to other products available in the market. The $12.95 annual fee is also much lower compared to other products listed below.
With Refresh, you'll pay an upfront deposit in cash to secure your Secured Card’s credit limit, which could range anywhere between $200 all the way up to $10,000. You can make regular purchases with this card, but you'll need to make monthly repayments towards it to avoid any penalties. Refresh will report your monthly repayments to both Equifax and TransUnion, which will get added to your credit report and help you build up your credit history.
Refresh Financial's Secured Card is an excellent choice for newcomers to Canada, students who haven't used credit before, and individuals working to re-establish credit after an insolvency. It's also a great option for anyone with low credit who is working towards a financial goal, like buying a car or buying a house. Capital One® Guaranteed Secured Mastercard®
Guaranteed credit card approval
$59 annual fee
19.8% annual interest rate
Credit bureau reporting to build credit
The Capital One Guaranteed Secured Mastercard is another great option for a secured credit card. It’s guaranteed if you meet the basic conditions, which include being the age of majority in your province or territory. You also must not have applied for a Capital One account in the last 30 days or had a Capital One account that was not in good standing in the last year, or have an existing Capital One account, or a pending application for one.
You must also provide the necessary security funds. Your security deposit will be between $75 and $300 required as collateral, though your credit limit may be more. If you ever decide to close your account, Capital One will return the security funds once your balance is paid in full. If approved, your credit limit would be $300 to $2,500, depending on your credit history. What’s important to note about this secured card is unlike prepaid cards, Capital One will report credit card activity to credit bureaus monthly. This lets you build better credit with responsible use.Capital One® Guaranteed Mastercard®
As you’ve probably figured out, the Capital One Guaranteed Mastercard is guaranteed as long as you meet some basic conditions. You must be at least the age of majority in the province or territory where you live. You must not have applied for a Capital One account in the last 30 days, and you haven’t had a Capital One account that was not in good standing in the last year.
You will only be asked to provide security funds in the event Capital One is unable to offer you the Guaranteed Mastercard and offers you the Guaranteed Secured Mastercard.Capital One® Low Rate Guaranteed Mastercard®
The Capital One Low Rate Guaranteed Mastercard has the same features as the Capital One Guaranteed Mastercard®but has a lower annual interest rate of 14.9% on purchases and balance transfers and a higher annual fee of $79. What makes this card appealing is the balance transfer option. Since your interest rate is 14.9%, it makes sense to transfer any outstanding debts you have on other credit cards with a higher interest rate. There are better low interest, balance transfer credit cards out there, but the Capital One Low Rate Guaranteed Mastercard is aimed at those with bad credit so it may actually be the best option for you.National Bank MC1 Mastercard®
One of the best credit cards in Canada for people with bad credit is the National Bank MC1 Mastercard since it has no annual fee. This card doesn’t require a security deposit, but it only has a limit of $500. There is no fee for supplementary cards, but note that the credit history only gets reported to the primary cardholder. If you’re looking for something basic to get you comfortable with using credit again, this may be the card for you. Check out National Bank's credit cards here.
About The Author
Barry Choi is a personal finance and travel expert based in Toronto who makes frequent media appearances in Canada and the US. You can read more of his work at moneywehave.com or follow him on Twitter: @barrychoi
Borrowell helps Canadians make great decisions about credit through free credit monitoring, low-interest personal loans, and financial product recommendations. Learn more about Borrowell.
The Capital One product details described in this article may have changed since the time of publication. Please see capitalone.ca for current product details.