Do you have financial problems and your credit report is in bad shape? Despite having bad credit, getting a credit card could help you re-establish your financial situation. Here are some options available to you.
Your credit report is a reflection of your borrower profile. It contains information about your past and current loans, repayment behaviour, debt ratio and bounced cheques, among other things. The data is provided by financial institutions and service providers (electricity, internet, cell phone, etc.) to credit reporting agencies such as Equifax and TransUnion. As a result of this information, you are given a rating. The higher the rating, the better your solvency, which indicates to lenders your ability to repay the loan or credit you have applied for.
Credit reporting agencies use a scoring system between 300 and 900. A score above 750 is excellent. It shows the lender that you are a low-risk borrower. A score of 500 or less makes accessing credit more difficult. In this case, the conditions for getting a loan risk being more severe and sometimes less beneficial (higher rate, endorsement required, etc.).
Ratings are composed of a letter, the type of credit and a number, your profile. The majority of ratings in North America are an “R” type, meaning “revolving or recurring credit.” The number 1 indicates that you have almost exemplary behaviour. On the contrary, the number 9 indicates that you have bad credit.
For its part, a credit card is one of the best tools to build your credit, and some of them help rebuild your credit report if you have had financial problems that have negatively impacted your rating.
This concept is similar to your debit card, but instead of spending money you don’t have, you spend money you have transferred to a prepaid card. You load the card with the desired amount and then use it like any other credit card. It’s possible to register your card to protect your funds in case of loss or theft.
However, few lenders report your payments to credit bureaus. Thus, prepaid card payments don’t always help rebuild your credit report, so be sure to ask your card issuer.
If your credit score is below 500, you could sign up for a secured credit card. Here, you pay the lender an amount greater or equal to the credit you are given. This option allows you to improve your credit rating by repaying your entire balance, or the minimum amount required, before or at the due date.
However, don’t forget that missing a payment has a negative impact on your credit report, whether the balance is $30 or $800. With this type of card, you could lose your security deposit and be unable to rebuild your credit rating.
Some issuers can offer you a secured card if your request for a regular credit card is refused. Ask your card issuer if this option is available.
A secured real estate equity card allows the lender to guarantee the credit limit that you’ve been granted on your home. The equity confirms to the lender your ability to pay or the possibility of recovering the loaned funds if you are in payment default. Sign-up and security fees may apply.
Most financial institutions offer these types of cards, and annual fees may apply. The rate for purchases, cash advances and balance transfers may vary depending on your risk level. The rate can also be set based on the issuer’s prime rate and can change at any time. Further, some issuers do not allow balance transfers on these cards.
Although it does not have to be perfect, your credit rating must be higher to get one of these cards. Additionally, one of the eligibility conditions for many issuers is that you have not declared bankruptcy in the last seven years.
Remember to always check the issuer’s requirements before applying.
Sometimes, offers arrive in the mail mentioning that you are pre-approved for a credit card, without conditions, up to a certain amount. These cards may include tempting offers of low or no interest rate for a limited time. This could be an interesting option to rebuild your credit. Be sure to ask about the normal conditions for this card once the promotion expires—limit, purchase interest rate and cash advances, grace period, etc. The regular rate will be applied to the remaining balance and could pose a risk for your credit repair.
Finally, there are guaranteed approval credit cards. The average interest rate for purchases, cash advances and balance transfers is higher, around 20%. This rate can increase quickly and can reach more than 29% if you are in payment default. You could obtain this type of card with a reduced rate for purchases and balance transfers. If your request is refused, the issuer could offer you a card with a regular rate. On the other hand, the issuer could require a security deposit between $75 and $300, an amount established based on your credit report.
Take time to really evaluate the different credit card options offered by National Bank so you can choose the best one for you. Your financial advisor could also help guide you in your decision.
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