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.