by Linda Paul, Licensed Insolvency Trustee
Whether you are trying to figure out which credit card is right for you or if you are looking to rebuild your credit, it is important to know your options. Most credit cards have the same basic functions – they offer convenience, when purchasing goods and services. Credit cards differ when it comes to interest rates, service fees, reward programs and member benefits. There are two main types of credit card options: secured credit cards and unsecured credit cards.
In most instances, when you are applying for a credit card, the application is made for an unsecured credit card. You may be a candidate for a secured credit card, if you have a low or poor credit rating or no credit history at all.
Your credit rating (or credit score) is an assessment of your financial health, which indicates the risk you represent for lenders, in comparison with other consumers. When you apply for a credit card, the credit grantor will look at your credit history. Equifax and TransUnion, the two main credit reporting agencies in Canada, ranks your credit rating using a scale from 300 to 900. Most credit grantors require that an individual’s credit score be at least 600, in order to qualify to receive an unsecured credit card.
Unsecured Credit Cards
An unsecured credit card has a credit limit which is pre-set or determined by the lender or credit grantor. The credit limit is set by the lender, based on certain criteria, including how creditworthy the lender believes you to be, as a consumer. This type of credit card is referred to as being unsecured, because there is no requirement to secure the use of the credit card by attaching to an asset or by providing a cash deposit to the lender.
Your application for an unsecured credit card can be denied if you have a bad credit rating or if you do not have a credit rating at all. Being denied a credit card can happen, especially for newcomers to Canada, who may not have a credit history. Because they are usually younger and just starting to branch out on their own, students may not have a credit history to support an application for an unsecured credit card. Individuals dealing with unemployment, divorce, a bankruptcy or a Consumer Proposal may also have difficulty being approved for a credit card. So, what happens if your lender decides that you are too risky for an unsecured credit card?
Secured credit cards
Unlike unsecured credit cards, a secured credit card requires a cash deposit to be provided to a lender, in order to secure your credit card usage. You pay a deposit to your lender, which equates to the same amount (or sometimes it can be double the amount) of the credit card limit. Meaning, if you provide a lender with a cash deposit of $500, the credit limit for the secured credit card will be $500 or $250, depending on how much of a credit risk you pose. The lender retains the cash deposit as collateral and provides you with the use and convenience of a credit card in return. While you are making use of the credit card, your lender will continue to hold onto the deposit. The cash deposit does not get applied to the balance owing on the credit card as you acquire goods and services through use of the credit card. You are required to make payments to pay down the credit card, just as you would with an unsecured credit card.
The lender will pay you interest on your cash deposit. Some lenders will even place your cash deposit in a Guaranteed Investment Certificate, so you earn greater interest on your cash deposit.
As previously mentioned, secured credit cards are an option for consumers who have not yet established a credit history or for individuals who find themselves with a credit rating that is below 600. Although a “cooling off period” regarding the use of credit may be prudent if you are currently in a bankruptcy or Consumer Proposal (or if you have recently been discharged from bankruptcy or fully performed your Consumer Proposal), many individuals want to rebuild their credit rating as soon as possible. Secured credit cards are an option for rebuilding your credit.
Contact us today if you have been denied a credit card or loan because you owe money. One of our Licensed Insolvency Trustees will be able to give you advice on what options are available, so you can work on rebuilding or improving your credit rating. Having a good credit rating and achieving your financial goals is attainable!
Based out of Abbotsford, Linda Paul is a Licensed Insolvency Trustee and Senior Vice President at MNP Ltd. To learn more about how Linda can help, contact her directly at 604-870-7445 or firstname.lastname@example.org.
With consumer debt at an all-time high in Canada, debt reduction is a priority for many. That being said, no debt reduction plan can be successful if one’s credit card use is not carefully managed. If your credit cards have gotten you into financial trouble, try these five tips for controlling your credit card use:
1. Have a spending plan and stick to it
Controlling credit card use – and staying out of debt – requires a realistic spending plan (or budget). But having a spending plan isn’t enough – expenses need to be reviewed on a regular basis so you can track where you are at and how much you have left to spend in a particular budget category. If you don’t track your progress, you are vulnerable to overspending and ending up needing to use credit cards to make up the shortfall.
Don’t forget to include irregular and annual expenses in your spending plan. These expenses, if not carefully planned out and saved, are often paid for with a credit card.
Having a realistic spending plan that addresses both regular and irregular expenses is crucial when controlling credit card use.
2. Have a cash reserve for emergencies
One of the common reasons for credit card debt, is unexpected or irregular expenses. As a general rule, you should have savings equal to three to six months’ income in the event of job loss, illness, a major home repair or other unexpected events. These savings should be separate from longer term savings accounts and plans and should be readily accessible should an emergency arise.
Having an appropriate cash reserve for emergencies will ensure that credit cards are not the go-to solution when the unexpected happens.
For tips on building a cash reserve see my blog "Build an Emergency Savings Plan in 5 Simple Steps."
3. Don’t have more than one major credit card
No one really needs more than one major credit card that is accepted worldwide. Having multiple major credit cards and department store cards not only makes you vulnerable to having multiple debts, it makes financial management that much more difficult when most or all of the cards have balances. Generally speaking, the total minimum monthly payment on multiple credit cards will be higher than the minimum monthly payment on one credit card, even if the total debt owed is the same. Simply put, any debt management plan is simpler and more efficient with fewer creditors.
4. Don’t carry your cards with you
Carrying a credit card only makes you more vulnerable to impulse spending and / or spending money that you do not actually have. When you use a credit card, it’s too easy to minimize or even ignore the immediate cost of goods and services because you don’t have to pay the bill for 30 days.
Leaving credit cards at home will mitigate impulse purchases and protect you from spending money that you do not have to your name.
One special situation is online shopping, which you can do in the comfort of your own home. If credit card use is a problem, cease online purchases altogether.
5. Don’t give your credit card to your spouse, kids or anyone else
Allowing others to use your credit card, or providing a supplemental credit card, makes you vulnerable to other peoples’ impulse spending or potential over-spending. Moreover, if others do not repay you for purchases they make, you are still legally liable to the credit card company.
When used responsibly, credit cards offer many benefits and conveniences, but they can cause a financial disaster when their use is not carefully controlled. Whether you are a seasoned credit card owner or new credit card user, the above tips will help you control your credit card use and the risk of new or additional credit card debt.
For more information or help with credit card debt contact me at 604 637 1599 or email@example.com.
This article was written for MNP Debt and the original post can be viewed here.