What is a credit building credit card?

A credit building credit card is for those with little or bad credit history. If you can pay off your spending in full every month, they can help (re)build your credit score.

The interest rates on these cards are usually very high, so it’s important to only use it for spending that you can pay back in full and on time.

How can it help repair your credit report

The following points should lead to an improved credit score. But you’ll need to be patient as it will take time to see your positive actions impact your score. Stick with it as it will open up other avenues for your financial success.

Use for a small amount of spending

Use the rebuilding credit card for spending you are going to make. It’s a good idea to spend roughly 50% or less of your credit limit as this can show you’re not dependant on borrowing. For example, if your credit limit is $250, aim to spend less than $125 each month. Smaller spending like $50 each month can also work.

As you won’t be using cash or your debit card, your chequing account will appear higher. But you’ll need this money to pay the balance at the end of each month.

Avoid withdrawing cash

As a general rule of thumb, refrain from withdrawing cash using a credit card. You may incur a withdrawal fee, and (usually expensive) interest rates will apply from the date of withdrawal to when you pay it off.

Regular cash withdrawals on your credit card can also negatively affect your credit score. Lenders will see regular withdrawals as difficulty on your part to manage your finances.

Pay the balance in full each month

If you pay the balance of your credit card in full and on time, you will not incur interest. Note that this is for spending; cash withdrawals incur interest from the date you withdraw the cash.

If you can’t pay the balance in full, then you must make the minimum payment. Interest will apply and will be based on your balance, including the part you have paid off.

If you don’t make the minimum payment or miss making the payment on time, you will likely incur a late payment fee. A missed payment mark is also likely to be noted on your credit report.

If you know you cannot make a payment, it is best to contact your card provider immediately. You can work with them to agree on an alternative payment option.

How to check your credit score

It’s a good idea to check your credit report on a regular basis. There are two main agencies that will hold your credit report: Equifax and TransUnion. Lenders will usually check one or both reports when you make an application for credit.

The Government of Canada has good information on how to obtain your credit report and score for free. Additionally, you could use a service like Borrowell to get your report for free too.

Note that your credit score is one of many different aspects a Lender will consider when assessing your application for credit. So if your credit score is excellent, it is not a guarantee that you’ll be approved.

What is a secured credit card and how it can help

A secured credit card is one that requires a deposit made by a customer to the card provider. It works as security, or a guarantee, that if you fail to make balance payments, the card provider can claim the deposit to cover the outstanding bill. The deposit removes risk to the card provider and can be easy to get for those with bad or little credit history.

The deposit amount depends on the credit limit that you may be approved for. For example, if a card has a $500 credit limit, the deposit required will likely be $500. In some instances, a provider may require twice the credit limit amount.

Note that the deposit is refundable. So if you make payments in full and on time, you can get the deposit back once you close your account.

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