Your credit score is one of the most significant pieces of information that affect your financial life. With a good credit score, you’ll likely have no problem getting access to credit cards, loans or a mortgage. However, if you’ve made some financial mistakes in the past, your credit score could be low, which might limit your future credit opportunities.
Although having bad credit can make it difficult to access credit, it’s still possible to get approved for credit cards. Unsecured, guaranteed approval and prepaid credit cards are all designed for people who have bad or no credit history. Depending on the card you get, you can work to improve your credit score over time. If you’re hoping to apply for a new card or improve your credit score, understanding how credit cards for bad credit work are essential.
The issuer performs a hard inquiry on your credit report whenever you apply for a traditional credit card. Since this inquiry can negatively affect your credit score, you’ll want to check your credit score through Equifax, TransUnion, or Borrowell before applying for a card.
Knowing your credit score gives you a rough idea of what type of credit card you should apply for.
Many credit card providers will require you to have a credit score of at least 660 to be approved for a new credit card. If you’re applying for a premium card, you may need an even higher score. If your credit score falls between 300 and 659, which is in the poor-to-fair territory, it’s highly unlikely you’ll be approved for an unsecured credit card. You’d be better off applying for a secured or prepaid credit card, as it won’t affect your credit score—and a secured card could even help you improve your score.
When considering credit cards for bad credit, you need to know the difference between secured and unsecured credit cards. With secured credit cards, a deposit is required and usually acts as your credit limit. For example, if you get a secured credit card and deposit $500 in security funds, your credit limit would be $500.
The security deposit is required as a show of good faith that you’re ready to use credit responsibly. As you make purchases and pay off your balance every month, the credit card provider will report your payments to the credit bureaus, which will help increase your credit score over time. If you don’t make your payments, the issuer will hang onto your deposit to cover the balance. But if you use your card responsibly and eventually close your account in good standing, you’ll get the deposit back.
Unsecured credit cards are the kind most people are familiar with. There’s no security deposit required, credit limits are usually higher, and many unsecured cards offer rewards like cash back or travel points. Once you’ve raised your credit score to the “good” range, you can apply for an unsecured card. Until that time, an unsecured card is often your best choice since it’ll help you rebuild your credit.
Even though you may have bad or no credit, you still have a surprising number of credit card options. Choose the best credit card for your needs based on your goals, the annual fee, and the benefits. Here are some credit cards for people with bad credit.
The no-annual-fee version of the Home Trust Secured Visa is incredibly popular. Security deposits can range from $500 to $10,000, so you can give yourself a larger credit limit if you want — just make sure you’ll be able to pay off your purchases. As you make your purchases and pay off your balance each month, your credit score will improve. This card offers a no-interest 21-day grace period, but if you don’t pay within that time, the standard interest rate is 19.99%.
This card also comes with purchase security, which ensures your eligible purchases from theft or damage for 90 days. This secured credit card can be used anywhere where Visa is accepted, but note there’s a foreign transaction fee of 2% when making purchases in any currency besides Canadian dollars. This card is not available to residents of Quebec.
The Home Trust Secured Visa card also offers an option to pay an annual fee in exchange for a lower interest rate. If you choose to pay either a $59 annual fee or a $5 monthly fee, you’ll get a standard purchase interest rate of 14.90%. The idea of paying a fee for a lower interest rate may sound appealing, it may not be your best option. While it could save you some money in the long run, you’d save even more by paying off your full balance every month if you can.
As the name implies, the Capital One Guaranteed Secured Mastercard offers guaranteed approval as long as you meet its basic conditions. You need to be the age of majority in your province or territory of residence. You can’t have an existing Capital One account, and you can’t have applied for a Capital One account more than once in the past 30 days. Finally, you must be able to supply security funds of either $75 or $300.
As long as you meet those conditions, you’ll be approved for this credit card. It has a purchase interest rate of 19.80% and an annual fee of $59. Capital One will report your payments to the credit bureaus, which will help you improve your credit score.
Since KOHO is a prepaid credit card, the issuer won’t perform a credit check when you apply. That means you’re guaranteed instant approval. There’s no security deposit required, but since KOHO is a prepaid card, you can only spend up to the amount you deposit onto it. Another advantage of KOHO is that you can earn a 1.2% interest on your balance and a 0.5% cash back on every purchase.
The downside is that KOHO doesn’t report to the credit bureaus by default, so this card isn’t ideal for helping build your credit. That said, KOHO recently introduced a credit building option ($7 a month) through which it will report your payments to TransUnion for 6 months. This program is renewable, so you can keep using it until you get your credit score to where you want it, but it’s not available in Saskatchewan. However, the program works out to $84 for a year, which is more than all of the secured credit cards on this list.
Recently acquired by Borrowell, the Refresh Financial Secured Card has an annual fee of $12.95, plus a monthly fee of $3. All in, you’re paying $48.95 a year for this card. The minimum security deposit is just $200, so it’s a good choice for people who don’t want to tie up too much of their cash, but remember that you can only spend up to your deposit amount. The purchase interest rate is 17.99%, and you’ll get a 21-day interest-free grace period.
When you apply for the Refresh Financial Secured Card, the issuer doesn’t perform a hard inquiry, so it could be a good choice if you have poor credit. If you get this card, plan to use it regularly to avoid the monthly inactivity fee of $2. Going over your credit limit also has consequences: You’ll be charged $5 the first time, and your card will be cancelled the second time.
When you have bad credit, it’ll be nearly impossible to get an unsecured credit card. You’re better off applying for a card you’re more likely to be approved for, such as a secured credit card. While these credit cards have limited benefits, if you use them responsibly, they will help you improve your credit score so you can eventually apply for a better card.
In most cases, you only need to meet the following requirements to apply for a secured or prepaid credit card:
Once you’ve been approved for your card, you’ll simply need to use it to make purchases and then pay your bills on time. It doesn’t matter if you spend $5 a month or $500; your lender just wants to see that you make your payments by the due date. As long as you pay your bills each month, preferably in full, your lender will report positive payments to the credit bureaus, and you should see some improvement in your credit score over time.
Remember that even though your secured card has a security deposit, not making payments is still a problem. If you pay late or skip a payment, your credit score could decrease and you may be charged a fee.
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Improving your credit score takes time and effort. Although you don’t technically need a credit card to build credit, having one will likely make the process easier. With a credit card, you can make small monthly purchases and pay them off as soon as your bill arrives. This helps you establish a pattern of consistent, responsible credit use.
This pattern matters because your payment history is one of the most significant factors that determine your credit score. Basically, lenders want to see that you’ve paid your bills on time, every time.
The amount you owe, or your credit utilization, is another important factor. Even though you may have a credit limit of, say, $1,000, charging less than $300 to your card each month would keep your credit utilization ratio under 30% — which can help improve your score.
Finally, there’s the length of your credit history. The longer you have had a credit card, the longer your credit history is. Credit bureaus like to see that you’ve managed your credit well over long periods of time. If you’ve made some financial mistakes in the past, rebuilding your credit may take some time, but if you use your card responsibly, you’ll eventually be able to improve your score.
Before you apply for any credit card, whether it’s a secured or unsecured card, you should make sure you’re likely to be approved. There’s no point trying to get a premium credit card when you don’t meet the minimum income requirements or have a poor credit score, as the credit check can lower your credit score even further. That’s why your first step should be to check your credit score.
Once you know your credit score, you can make a list of the types of cards you’ll qualify for based on your score and income. Next, you should compare factors such as the annual fee, security deposit requirement, interest rate, and any benefits or rewards. Focus on what’s most important to you. For people with bad credit, that’s likely the goal of improving your credit score. Remember that this isn’t your forever card— it’s meant to serve a purpose and help you qualify for a better card later on.
Secured cards can be a good option for people who have bad credit or with no credit, like new immigrants and young people without established credit scores. Prepaid cards could also be a good match for your needs, although most of them won’t help you build credit.
Barry Choi is a personal finance and travel expert. His website moneywehave.com is one of Canada's most trusted sites when it comes to all things related to money and travel. You can reach him on Twitter: @barrychoi.