The average credit score in Canada is 600. The question then arises; can you get a credit card with bad credit? To get an answer to this, we’ll first have to look at how credit ratings work.
According to Equifax and Transunion, having a score less than 620 will prove challenging to get you additional credit. These are the two best-known credit bureaus in Canada. Your credit score serves as your financial portfolio.
Every person has a different credit rating depending on the financial position and other factors associated with it.
Read on to learn more!
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How Do Credit Scores Work?
A credit score is a number lenders use to decide whether to extend a credit facility to borrowers. The score is created using an algorithm based on your credit reports that summarize your borrowing history. The introduction of credit rating based on these scores has made borrowers more careful about their credit spending habits.
On the other hand, it paints the actual picture of a borrower’s financial habits. This tells them your likelihood of defaulting on a loan in case they extend one to you. If you’ve borrowed loans before and successfully repaid them without defaulting, your application will likely be successful.
If your history shows you’ve recently defaulted on several loans, the chances are that your application will be rejected.
Whenever you borrow a credit facility from any lender, your activity on that loan is reported to the credit bureau. Reading through all that information is time-consuming, and it can be easy to miss some details. This is why the scores are computer generated.
Types of Scores
As a borrower, you’ve got multiple credit scores. For every scoring model available, you’ve got at least a score. They’re referred to FICO credit scores, but for every credit bureau, the rating is different.
When discussing your score, you should strive to understand the type of score in use. Regardless of the score you use, the bottom line is to predict how you’re likely to repay. The FICO score takes into account your past and current debts and how you’ve repaid in the past.
The scores are a number between 300 and 850. The higher the score is, the more the probability that you’ll qualify for a credit facility.
Here are the components that make up your credit score:
- 35% is assigned to your payment history
- 30% goes to your current debt
- 15% is about the length of credit
- 10% goes to new credit you’ve applied for in the past
- The remaining 10% is assigned to the mix of types of credit you’ve got
For applicants without a borrowing history for one reason or another, alternative credit scores are used. For example, the lender could consider their utility bills and rent, among others.
What Happens When You Have a Bad Credit Score?
Most people with bad credit may not qualify for a credit card. Don’t let this pull you down. Bad credit happens to good people, and it doesn't mean that you're less important than those with good scores.
If you continuously find yourself unable to pay bills on time, it means your debts are becoming unmanageable. Other warning signs are receiving calls from debt collectors and issuing bouncing checks.
The first thing you might need to do is to work on rebuilding your credit score. This is a process that won't happen overnight but will put you at a better position with the lenders.
A credit card is one option to help you get your credit ratings back in good shape. The question is, can you get a credit card with bad credit? You might have heard that it’s not possible, but you’ll be surprised to know that you can.
You may not get approved for all types of credit cards with a bad score, but there are two types you can consider. These are specially made for borrowers with a poor credit rating or no credit at all. They'll help open up your financial possibilities.
1. Secured Credit Cards
A secured credit card is one answer as to “can you get a credit card with bad credit?” It works in the same way as a regular credit, but you must deposit a refundable security deposit. This amount is equal to the credit limit on your card.
Once the lender opens an account for you, use the card in the same way as an unsecured credit card. The only difference is that if you default, the lender will hold the amount you deposited.
Just like with other cards, you’ll receive a monthly statement. You’ll be charged some interest on any balance on the card. The most important aspect of a secured credit card is your repayment history.
As such, strive to make all your payments in good time. Using the card responsibly will see your scores increase, probably qualifying you for an unsecured card. When this happens, the lender will return your security deposit and might even increase your credit limit.
Since a deposit secures acts as collateral on the credit cards, lenders can issue them to almost all applicants. The main thing is for the applicants to be able to verify their identity and not have any pending bankruptcy cases.
Secured credit cards come with relatively low fees and comparable benefits. For example, they come with basic travel insurance and purchase protection policies.
2. Subprime Credit Cards
This is an unsecured credit card and is another answer to “can you get a credit card with bad credit?” Unlike the secured version, it requires no security deposit. However, lenders usually reduce their risk by imposing substantial feed to the account.
Most require a one-time fee to open, besides the annual and sometimes monthly fees payable. Cash advance fees, additional user fees, and foreign transaction fees are relatively high.
With a subprime card, you will receive a very small line of credit at a higher interest rate than most credit cards. Unlike the secured one, these cards don’t offer travel insurance and purchase protection. The good thing is, after a year of timely payments, the cardholders can qualify for other types of cards.
These come at lower rates and fees.
Choosing the Best Credit Card
Now that you have answers to “can you get a credit card with bad credit” how do you choose the best one? One of the best places to start is to consider how much you’ll be spending on the card. If you go for the secured credit card, do you have the money for a security deposit?
If you don’t have the cash, this is where you might want to go for the subprime card. If you are using the card to make purchases, go for the one with lower fees and interest rates. Remember that the subprime cards come with a lower credit limit and higher costs.
In other words, they give you less spending power, while the secured type offers you more perks and opportunities.
Thirdly, pick a card that reports your account and payment information to one of the credit bureaus. This is how your credit score will improve, especially if you’re on track in making repayments.
Things to Keep in Mind
Take note of retail stores known for approving applications from people with bad credit. In most times, you’ll only be approved for a limited purpose card, one that you can only use in that store. The card won’t be backed by Visa or MasterCard and will hence limit your options.
Besides, such cards come with a low limit but very high-interest rates. To manage a card like this, you can only charge a small amount and pay the balance in full each month.
Avoid wasting your time on credit cards meant for applicants with a good credit score. You'll most likely be denied, and the additional application may reflect poorly on your credit score. While at it, avoid subprime cards that charge higher upfront fees than the law stipulates.
There is also the category of prepaid security cards that you should avoid. Although they're often advertised as an option for bad credit, they don't help much. The cards require you to deposit some cash before making purchases.
Unlike the secured cards, prepaid card purchases are deducted from the deposit balance. Note that they also don’t report your account activity to the credit bureaus.
Can You Get a Credit Card with Bad Credit? - Take Away
Even with a bad credit score, sometimes you'll still need a credit facility or a credit card. The chances are that you won't qualify unless you first rebuild your score. However, this shouldn't be a block to the question "can you get a credit card with bad credit."
There are two credit card options that you can consider. One is the secured credit card, and the other is the subprime card. With the first, you've got to make a deposit with the lender. This will be refunded upon the successful repayment of the credit card limit.
With the subprime cards, you'll part with higher fees and interest rates, but no deposit is required. Make your options carefully to avoid ending up in a worse position for non-payments. Once you qualify for a credit card, ensure you make timely payments.
This will work towards improving your score, qualifying you for other types of credit.
For more information, read this post on how to earn credit card reward points quickly.
