Best Credit Cards for People With Bad Credit in Canada
What You Should Know
- Credit is essential in our society, so it's vital to improve your score.
- A bad score makes it challenging to get approved for loans, rent an apartment, or even land a job.
- One of the best ways to improve your credit score is by using a credit card responsibly.
- If you can't get approved for an unsecured card, apply for a secured one.
- Use your credit card regularly, and pay off your balance in full each month.
To be approved for lending products in Canada, you must prove you are reliable. Reliability is measured through your credit score, which is your track record of timely debt payments. Missing debt payments can send you into a downward spiral that shatters your credit score and makes it hard to be approved for new lending products.
The best way to build up your credit score again is by responsibly using credit cards and other loans for bad credit to regain the trust of financial institutions gradually. Although credit cards can be challenging to find for people with bad credit, they're not impossible. Usually, these credit cards don't come with many of the additional benefits that travel credit cards do, yet they still have an annual fee.
However, the process is worthwhile because having a good credit score will save you thousands of dollars by accessing the best mortgage rates. Additionally, you may not even be eligible to buy a home or rent a property without a good credit score.
This guide compares the best credit cards for people with bad credit. However, you can damage your score even more without building healthy financial habits. This is why the second half of this article will explain the best ways to increase your credit score. Putting a bandaid over the issue is not enough. We want to help you address the root cause of your challenges. Continue reading to begin your journey to repairing your credit score.
Types of Credit Cards for People With Bad Credit
There are three categories of cards for people with bad credit. If your credit score is decent, you may be eligible for an unsecured credit card. Otherwise, you may be required to use a secured or prepaid credit card. Continue reading to learn the difference between the three types.
| Secured | Unsecured | Prepaid | |
|---|---|---|---|
| Chances of Approval | High | Moderate | Guaranteed |
| Deposit Required | Yes | No | Pay-as-you-go |
| Credit Limit Determining Factor | Deposit Amount | Income and Credit Score | Balance Amount |
| Affects Your Credit Score | Yes | Yes | No |
Secured Credit Cards
You can think of a secured credit card as lending money to yourself. They are a type of secured loan which require a deposit. A secured credit card requires a security deposit, which is usually equal to the amount of credit available on the card. If you miss payments or default on your debt, this deposit acts as collateral. However, you will have to pay interest on your outstanding balance to the credit card company. Additionally, you will not earn any interest on your deposit as you would by investing in a GIC.
Secured credit cards are the easiest to get approved for because there is no risk for the card company. They are the last resort because your deposit money could be invested elsewhere. Most people will begin with a secured credit card and then transfer to an unsecured card. With that being said, using a secured credit card is a great way to improve your credit score over time.
Unsecuring your credit card
After building your credit score through a secured card, you may want to upgrade and receive your deposit back. Consider looking for a secured credit card company that also offers unsecured cards. This will allow you to receive your secured deposit back without impacting your credit score. If you shop at a retail store regularly, you can also look into store credit cards offered by the retailer. These cards usually have no annual fee and are easy to qualify for.
Part of your credit score calculation is the age of your credit accounts, which is why closing a secured account will impact your credit score. Instead, switch from a secured to an unsecured card within the same company. This allows you to maintain the credit account age while receiving your deposit.
Unsecured Credit Cards
An unsecured credit card is the best option for people with bad credit scores. You don't need to put down a security deposit, and you can earn rewards like cash back or points on your purchases. The only downside is that unsecured cards are more challenging to be approved for.
When looking for an unsecured credit card, it's essential to compare the features and benefits of each card. Some cards will offer a lower interest rate or annual fee, while others will give you rewards on your spending. It's crucial to find a card that fits your needs and lifestyle.
Prepaid Credit Cards
A prepaid credit card is similar to a debit card because you need to have money in your account before you can spend it. It is different from a secured credit card because a prepaid credit card does not have a deposit or interest rate. Instead, it has a balance that cannot be negative.
Most prepaid credit cards do not affect your credit score, but some of them offer a credit-building option for their cards. For example, KOHO’s credit building feature costs an additional $10 per month. Without this feature, your credit score won’t improve through using this card.
Additional Considerations
By now, you have seen the top credit cards for people with bad credit and understand the different types of cards available to you. However, your decision to find the best card might still be overwhelming. We have included additional considerations below to help you narrow it down to the perfect card.
Annual Fee
An annual fee is a charge that is incurred every year for the use of a credit card. Interestingly, many poor credit score cards have yearly and monthly fees. For example, Refresh Financial's secured card has an annual fee of $12.95 and a monthly charge of $3.00.
After building your credit score, it's ideal to keep your credit account open even if you switch to better cards. This is because your credit score calculation includes the average age of your credit accounts. Thus closing your oldest credit account will decrease the average age and negatively affect your credit score. You should prioritize a no annual fee card so you don't have to keep paying the fee to maintain a higher credit score.
However, your credit card company will offer various cards in some cases. In this case, you can transfer your account to a different card from the same company, and it won't affect your credit score. If your company allows this, you can switch from a paid to a free card and leave the account open.
Instant Approval Credit Cards
Most credit card applications take a few business days to receive an answer. This can be nerve-wracking while you wait. An instant approval credit card is an excellent option if you have bad credit and need a card quickly. These cards do not require a credit check and can be approved in minutes. However, they generally have high fees and interest rates.
Guaranteed Approval Credit Cards
Guaranteed approval cards are rare in Canada. Essentially if you meet a set of requirements, you will most likely receive a secured card. Some guaranteed approval cards in Canada include Capital One Guaranteed Mastercard, Neo Secured Mastercard, and Plastk Secured Visa. They have requirements such as:
- Canadian permanent resident
- Age of majority in province or territory
- Paying the security deposit from your Canadian bank account
- Not currently in bankruptcy or under a consumer proposal
- Have a source of regular income
How to Get a Good Credit Score
Now that you understand how to get a credit card, the next step is rebuilding your score. First, it's essential to know how your credit score is calculated. While this is already explained in detail in our Credit Score Canada article, you can reference the table below for a quick refresher. Essentially, there are five factors with different weightings. If an element has a more significant weighting, it will impact your score more.
| Factor | Weighting | Description |
|---|---|---|
| Payment History | 35% | Track record of on-time payments. |
| Credit Utilization | 30% | Balance remains below 30% of the credit limit per card. |
| Credit History | 15% | High average age of credit accounts. |
| Variety of Credit | 10% | Having different types of credit. |
| New Inquiries | 10% | Not frequently applying for new credit accounts. |
Now that you understand how your score is calculated, you can begin to optimize for the factors. Understand that your score doesn't increase quickly. It can take months or even years to get the best credit score in Canada. Additionally, while it takes time to build your score, it can quickly drop. Be consistent, and don't lose motivation if you slip up. Beginning with the most critical behaviours, you will get a good credit score through the following actions.
1. Always Pay on Time
Around 35% of your credit score is affected by your payment history. One missed or late payment will send your score tumbling. If you are a forgetful person (or want to save time), consider setting up a pre-authorized debit (PAD). A PAD is an agreement between your credit card company and your chequing account provider.
The PAD form can be requested from your credit card company and filled in with your banking information. It will automatically withdraw the required amount from your chequing account and pay off your card. You can pay the entire statement amount or make the minimum payments. Always ensure you make the complete payment to avoid interest charges and keep a low balance. If you always fully pay off your statement, the card's interest rate won't be important.
2. Keep a Low Balance
Credit utilization is the second most crucial factor in your score calculation. It comprises 30% of your total score. Credit utilization is a ratio that compares your current balance to your credit limit. The lower the ratio, the better your score. Ideally, it's best to keep it below 30%.
If you have a $500 credit limit, you should keep your balance below $150. If your balance exceeds the limit, make an early payment to bring the balance below. Credit utilization is calculated on an individual basis for every card. Having multiple cards will allow you to keep a lower balance on each one.
However, applying for multiple cards will affect your score in the short term. Additionally, you will have to manage more cards and ensure you are paying them off in full every month.
3. Don't Close Your Oldest Account
As mentioned earlier in this article, 15% of your credit score is calculated by the average age of your credit history. The longer your record, the better. You can improve this factor by keeping your oldest account open, even if you never use it.
If you have an unused card with an annual fee, some companies will waive the cost if you call and ask. If not, you can request to switch to an unpaid card from the same company. This will allow you to keep the credit account open while removing the annual fee.
4. Have Different Types of Credit
Your credit mix determines 10% of your credit score. You can improve this factor by diversifying your types of credit. For example, if you have only ever had credit cards, try to get a car loan.
You can also improve this factor by having secured and unsecured credit products. Secured products are backed by collateral, such as a car or home. Unsecured products are not backed by anything and includes credit cards and personal loans.
Prioritize keeping a low balance and always paying on time. If you are rebuilding your score, you may not have access to different types of credit. In this case, this factor is not a priority considering the low weighting.
5. Don't Constantly Apply for New Credit
10% of your credit score is impacted every time you make a hard inquiry. A hard inquiry is when you apply for a new credit product, and the lender checks your credit score. Each hard inquiry stays on your report for two years, but its impact diminishes over time.
Inquiries have the most significant impact in the first year. As a result, it's best to space out applications, so you're not constantly getting new inquiries. If you apply for multiple products in a short period, try to do it within a 14-day window. This is because inquiries made within this window are grouped as one inquiry.
Bonus: Check Your Report Regularly
You are entitled to one free credit report from each of the two Credit Reporting Agencies (CRAs) every month. It's essential to check your information regularly to ensure no errors. If you find an error, you can dispute it with the credit bureau and have it removed from your report.
You can access your free credit report by visiting the websites of Equifax and TransUnion. Additionally, there are free websites to check your credit score, such as Credit Karma.
Credit Cards for Students
Students in Canada will have a tough time applying for credit cards without a credit history. Fortunately, many banks provide student credit cards to address this issue. Their goal is to become your go-to bank as you age.
Student credit cards are often no-frills cards with a low credit limit. It's common for your first credit card to have a limit of around $500 to $1,000. Additionally, they will have low or no income requirements. Remember to keep your credit balance below 30%. Some of the best student cards to help you build credit include:
Credit Cards for Recent Immigrants
If you are a recent immigrant to Canada, getting approved for a credit card can be tough. Credit issuers often require a Canadian credit history, which can be difficult to obtain. This is because Canadian banks will not recognize your credit score from another country. As a result, you'll need to build a credit score from scratch.
Fortunately, some companies give recent immigrants a chance. For example, many banks offer newcomer credit cards that don't require a credit history. Some unsecured credit cards for recent immigrants include:
The Bottom Line
Credit is essential in our society, so it's vital to improve your score. Bad credit can make it challenging to get approved for loans, rent an apartment, or even land a job. One of the best ways to do this is by using a credit card responsibly.
Use your credit card regularly, and pay off your balance in full each month. This will show creditors that you are using credit responsibly and improve your credit score over time. You can also consider getting a secured credit card, which is a great way to rebuild your credit if you have bad credit.