With the global economic downturn having just started to abate, Canadian banking institutions are very careful as to whom they issue credit cards. If you have bad or no credit, you will most likely be rejected by all the companies you go to. In case you get accepted somewhere, you will be charged ridiculously high interest rates every month. This is one outcome to avoid.
What is the alternative? Most financial experts will recommend applying for a secured credit card. The limit of this type of financial instrument is usually in the range of $300 and $500. You can set it at any amount you want and this sum guarantees the card – hence the name “secured”. Basically, you mail the company a check worth a given amount, and they send you back a card with that limit. Setting your own limit is a major perk, as is the low interest – just under 10 percent compared to over 25 percent for certain unsecured cards. In some cases, your limit is a percent above the amount you have set.
Disadvantages? The annual fee on such cards is 50 percent, and some companies charge an application fee as well. Some secured cards are a bad deal – you find your balance depleted by fees before you have even used the card – but others are quite acceptable and recommendable. Shop around before you make up your mind. Unfortunately, not all banks feature this financial product while credit unions offer secured cards to their members. In some cases, annual fees are not charged, and you gain the advantage of lower interest. The fees charged vary greatly depending on the company (the bottom line, keep your eyes open).
The current tendency is to shift away from secured cards in favor of unsecured ones with higher fees and rates and lower limits. However, secured cards will always hold a market share. Sometimes, they are the only choice for people with no credit or persons recovering from traumatic life events such as illness, loss of employment or getting a divorce. If you have a poor credit history and want to improve your credit score, obtaining a secured card is a good option as well.
Your best bet is a secured card with a low fee or no fee at all. Avoid companies that will try to manipulate you when they see you are in a tough situation. Some businesses are downright heinous – they give you a card on the condition that you buy an insurance policy to be paid monthly, the cost of which may reach one hundred dollars a month. Read the fine print before you sign contract with any credit card company.
In Canada, you can apply for this financial product with the Big Five or some of the other credit card providers. The Royal Bank of Canada, for example, offers a Secured RBC Royal Bank Credit Card which works as a regular one and brings reward points that can be redeemed for merchandise. The security pledge of the client is deposited in a RBC Guaranteed Investment Certificate.
Once you are issued a secured credit card, do not treat it like a savings account. Interest and fees do pile up. Do not try to sustain a balance – instead, buy a number of things you need and pay the card off systematically and in a timely manner.