Anyone who has been discharged from a bankruptcy in Canada will not have any credit cards. That’s because all credit cards had to be surrendered when filing for the bankruptcy – even if they had a zero balance. Believe it or not, there really are some places that want to give you a credit card, even if you just got discharged from your bankruptcy yesterday. But first, let me tell you a little story.
The day I had to give up my credit cards, I felt helpless without them. I’m not talking about whipping out a Visa card to pay for a meal or a tank of gas for you car. You can use cash for that. There are certain bills that can only be paid by a credit card. I found that out in September 2007 when I filed for bankruptcy and had to surrender all of my credit cards. My home phone service was, and still is with Vonage Canada. I love it, but they only take credit cards for payment. I had to get a friend to pay for me with her card and I paid her back in cash. I couldn’t even rent a carpet cleaning machine at Home Depot since they required a credit card to preauthorize a deposit, and they didn’t accept cash. And forget about renting a car or shopping online.
Prepaid vs Secured Credit Cards
I thought I had found the solution. A prepaid credit card. Money Mart (called Insta-Cheques in Quebec) offers the Titanium Plus prepaid MasterCard. You simply go to the local Money Mart or Insta-Cheques store and give them some cash to put on it, plus a bit extra for a set up fee when you first open it. Then, if you give them $150, your card has a $150 limit. Next week you put $500 on it, and that’s your new limit. Kind of like a bank debit card linked to a bank account, but its got a MasterCard logo on it and it’s treated just like a real credit card in most cases. You simply pay an activation fee, a monthly fee and lots of other fees. But hey, who’s complaining? When you think that’s your only option, you take what you can get, right? I was “back in the game” – or so I thought.
After cheerfully using that prepaid MasterCard for a year, I discovered that my credit score and profile were not all that good. Of course, being just one year past my bankruptcy discharge didn’t help. This was mid-2009 and the credit guidelines had tightened up everywhere in Canada and there was no sign of them getting any easier. I thought (and secretly hoped) that my prepaid Titanium MasterCard had been reporting to Equifax and TransUnion Canada credit bureaus. But I knew in the back of my mind that this card was just a bit too easy to get and probably didn’t report to the credit bureaus. I was right. Life after bankruptcy in Canada is a bit rough, especially right after you’re discharged from a bankruptcy. Anything worth having takes a bit of effort. You can’t expect it to be as easy as for everyone else who didn’t have the luxury of being able to walk away from their debts.
So much for a fresh financial start, eh? I discovered that with the ever more strict credit requirements that nobody was going to extend credit to me until a bit more time had passed from by bankruptcy discharge and until I had at least one year of re-established credit. But how was I supposed to have one year of re-established credit if nobody would extend credit to me?
The answer was a SECURED credit card. One where I had to send in a minimum $500 deposit to get a $500 line of “credit.” With secured credit cards in Canada, the deposit is refunded in full with interest when you close the account, but cannot be used to pay down your monthly balance. But the good part is that a true secured credit card will report to the credit bureaus. Virtually everyone is approved, but you must be discharged from your bankruptcy. As long as you’re making timely payments of at least the minimum balance or more, your credit report improves and your credit score goes up. I had to save up for a little while to be able to part with $500, but knowing how important this was and how beneficial it would be, I did it.
The Power of a Secured Credit Card
The major benefit of a secured credit card is that it will report to the credit bureaus and, providing you’re making your monthly payments on time, will help improve your credit report and credit score. Of course, if you miss payments, that will also report to the credit bureaus and work against you – more than for a someone who doesn’t have a past bankruptcy. A prepaid card will not report to any credit bureaus because there’s no “due date” for payments. When you use up the money on the card, you just add more when you get a chance. That’s not a real credit card and that’s not the way credit works in the real world. If you’re serious about your credit and want to get ahead, you’ll want a secured credit card.
Is this starting to make sense now? I hope so. Don’t worry if this sounds new and confusing. Many people do not know the difference between a prepaid and a secured credit card. Just because there’s a Visa or MasterCard logo on it, doesn’t mean they’re all the same. You may need to educate your friends, family and even businesspeople! You will be truly surprised at how little the majority of Canadians know about the way credit works.
By now, you should definitely see the value in having a secured credit card. If you’re recovering from a bankruptcy, and you want to live in today’s modern, credit-driven society, you need a secured credit card.
How a Secured Credit Card Works
A secured credit card company will require you to send them a cheque or money order of at least $500 (depending on the company) along with an application form. Once approved, you will receive your credit card in the mail. There are some set up fees and monthly service fees, and a moderate to high interest rate on balances, but those are charged directly to your new credit card. You can then use your new secured credit card as you would a normal credit card. When the bill comes in, you pay the balance, or at least the minimum payment. That gets reported to the credit bureau and will help rebuild your credit profile and increase your credit score – just as if you had been using a regular unsecured credit card! Of course, if you are late or miss payment, that also gets reported to the credit bureaus and hurts your chances of recovery.
Unlike a conventional unsecured credit card, you won’t get automatic credit limit increases. If you would like a higher credit limit, you need to send in more money to increase your deposit – usually in one hundred dollar increments. Depending on the company, secured credit cards cannot turn into unsecured credit cards. With People’s Trust MasterCard, the one I have, you can close your secured card and get your deposit back after your last monthly bill is paid in full, but you won’t ever be able to get it converted to an unsecured credit card. If you want an unsecured credit card, you’ll need to wait until your credit is strong enough to qualify for an unsecured card. With the trends in the credit world in Canada these days, many card issuers won’t even consider you for an unsecured card until the bankruptcy is no longer reporting on your credit report – that’s six years from the day you were discharged. Other card issuers may consider you after two to three years of new, re-established credit after your discharge from bankruptcy.
The Wrong Way to Get a Secured Credit Card
Now that you know the value of a secured credit card, you want to know how to obtain one, right? Good. Although some banks may offer secured credit cards, I suggest you stay away from them.
Let me tell you a quick story. In the summer of 2009, when I realized I needed to stop using a prepaid MasterCard and get a secured credit card, I went into my home branch of both banks I dealt with: ScotiaBank and TD Canada Trust. I couldn’t get anywhere with ScotiaBank. They wouldn’t give me an appointment or return my phone calls when they knew I had a recent bankruptcy. Finally after phoning the credit department for ScotiaBank Visa and speaking to a supervisor, I found out ScotiaBank will not extend any credit – even a secured credit card – to anyone with a bankruptcy appearing on his or her credit report.
Then I tried TD Canada Trust and actually felt quite confident I’d be getting a secured Visa credit card from them. The lady I spoke with seemed very knowledgeable and said everything with such conviction that I truly believed her. However, that soon turned to disappointment when I found that my application for a secured credit card was declined. Both the bank representative and I discovered that TD Canada Trust will not approve anyone for a secured credit until at least three years after the bankruptcy had been discharged. This, after fully disclosing all the details to her, including the fact that my bankruptcy had been discharged only 13 months prior. To add insult to injury, I got a new credit inquiry on my credit report, which lowered my score, as any credit inquiry will do. And it will stay on my credit report for three years. Of course, the fact that I had included a TD Visa card with about $450 on it in my bankruptcy didn’t help. Don’t let your case be a learning experience for a new employee.
Don’t Believe Everything You Hear From Bank & Other Employees in the Credit World
Some employees don’t like to look stupid, so if they don’t know an answer, they make it up as long as it sounds logical. Or worse yet, they state opinion as fact. They’ll sound believable because they are the person in authority that you are looking up to. Unless you can get something in writing, don’t believe it. Just ask them to put it in writing and you’ll see them back peddle! As the saying goes, “trust, but verify.” If you can’t get the answer you want, keep asking different people until you get the same answer at least three times. You will encounter other employees who don’t want to risk giving a wrong answer. Either because they truly don’t know, or because they’d rather play it safe, they’ll tell you there is absolutely no way to guarantee you that you’ll be approved. You just need to apply and then you’ll find out. Of course I wouldn’t expect anyone to give me a 100% guarantee that I’ll be approved without doing a credit inquiry. But some people don’t realize, or care, that credit inquiries lower your score and stay there for three years. I just tell them that I will only apply if it seems fairly certain that I would be approved.
Unless it’s clearly stated on the application form or the company’s website that people with a discharged bankruptcy appearing on their credit reports – regardless of how long ago it was – are welcome to apply for their secured credit card, don’t apply. Some will outright say that they don’t approve any applications with a bankruptcy appearing on the applicant’s credit report, so there’s no point in applying and getting the resulting credit inquiry. A few employees have told me that their company will accept all applications. Of course they will accept all applications, but if you know for sure, or have a very strong suspicion that it will be rejected if your bankruptcy still shows on your credit report, then there’s no point in applying.
Why You Should Avoid Applying For Credit Too Often
There IS harm in applying “just to find out.” Each credit inquiry lowers your credit score by a few points, and you can’t afford to lose any points right now. Plus, the more you apply, the worse it makes you look. You’ll be seen as a “credit seeker” and if nothing else, declined for too many credit application inquires.
Who knew it could be so hard to get a secured credit card? The bank gets to hold your money as collateral, which greatly minimizes their risk. Go figure! I actually got a somewhat reasonable explanation from a Royal Bank representative in the card services department. Apparently, at least with RBC, part of the risk is assumed by them and part of it by Visa. It seems that they actually still have some risk in the even of a card holder defaulting, since they don’t get all of the security deposit. Unless the credit guidelines change (which probably won’t be for a long time, if ever), you’ll need to go elsewhere for your secured credit cards.
Where can I get a good secured credit card in Canada?
Two secured credit cards came highly recommended to me: People’s Trust MasterCard (formerly known as Horizon Plus MasterCard) and Home Trust Visa. I was very excited when I read on their websites that virtually everyone is approved. As long as you are 18 or older and be discharged from your bankruptcy (if applicable), plus a few other logical requirements, your chances of approval are excellent. You just need to print the application form from their websites and mail it in with your deposit. Your deposit becomes your credit limit. It cannot be decreased. It can be increased anytime in the future by simply sending in more money to add to the deposit.
Unfortunately, Home Trust Visa is not available to residents of Quebec, so I had to pass on that one. But I did apply for and receive a People’s Trust MasterCard. I’ve been using and paying it ever since. It’s been reporting to my Equifax and TransUnion credit reports for a year already which has greatly helped to strengthen my credit. It would have been nice to have two lines of credit reporting to my credit reports, but one is better than nothing. If you are able to get two secured cards, go for it. Later, when you apply for other credit, like a mortgage or car loan, some lenders like to see more than just one line of re-established credit.
People’s Trust MasterCard required a personal cheque with my full name and current address, so I had to order new cheques. They hold the funds until they clear, although a certified cheque does help speed up the process. I began with their minimum deposit of $500. A few months later, I saved up and sent another $500 to increase my credit limit. Today, a $500 limit does not look very realistic and is easy to max out, which also lowers your credit scores. That’s why I wanted to increase it to $1000. In fact, I want to increase it to $2500. Firstly, it’s forced savings. Second, it isn’t too high of a credit limit to work against me. At a certain point, you can get a limit that is too high. If your income is low and you have a large amount of available credit, many lenders get nervous. The theory being you could go and max out your credit cards which would result in a very high debt to income ratio. But that’s a story for another time.
There are other companies out there offering secured credit cards for Canadians, however People’s Trust MasterCard and Home Trust Visa continually get good reviews and they look good on your credit report. Other cards, especially if from a high interest finance company, may not work in your favour. I have personally used my People’s Trust MasterCard for a year already and would highly recommend it to anyone recovering from a bankruptcy in Canada. I’m not sure how good the success level is with any of the other secured credit cards out there today so I don’t want to recommend them at this time.
Make sure you use, but don’t overuse your secured credit cards
To gain any benefit from secured credit cards, or any credit cards for that matter, you need to actually use them. The optimal way to do this would be to charge a small amount, wait for the monthly statement and then pay on or preferably before the due date. This way, it will demonstrate that you can handle your credit responsibly.
Make sure not to charge too much. Although some experts will say to charge no more than 5% of your available balance, a commonly acceptable amount is 20% to 30%. Some would even suggest up to 50% but that’s getting a bit too high. So now you’re probably asking, “does this mean if I send in a $1000 deposit, I should not have a balance of any more than $200 or $300 at any given time?” YES! That’s exactly right. There’s nothing worse than charging $950 on a card with a $1000 limit. Or worse yet, maxing it out and making it go over the limit with the interest charges. This will report to the credit bureaus and lower your score because it looks like you’re short on cash or in financial trouble – especially if it’s like that every month.
OK, so how about paying the balance before the bill even comes in? Let’s say you know exactly how much was charged and you go online to pay that amount as soon as you get home. Bad idea. For one, until the transaction gets posted – which can take up to 10 days – your payment will not be applied since you are typically not allowed to overpay your secured credit card. Perhaps it’s because that would be a loophole to increase your credit limit. Not only that, your credit report and credit score wouldn’t benefit. If you pay any amount before the statement is printed, it will report to the credit bureau that you have a zero balance. It will look like you aren’t using your credit card and that won’t build up any payment history. You need to let a small balance report to the credit bureau and then pay it. You can pay it the day you get your statement, just not any sooner.
Remember not to charge more than 20% to 30% of your available credit limit. Charge your cell phone bill, Internet bill or hydro bill to your secured card. In fact, set up automatic payments so that you never have to worry about late payments again! If you don’t have any bills to charge to your secured credit card, use it to pay for gas for your car or routine purchases.
On a final note, I noticed on my TransUnion credit report that there is a neat little graph showing my usage of my available credit from month to month. That means if I can see it, so can lenders and card issuers. If you find that your credit limit is too low, save up and send some more money to increase your deposit. You probably won’t hear this from anyone else, especially if you are recently discharged from a bankruptcy, but “Happy spending! Just charge it!” (responsibly of course). And don’t delay. The sooner you start using a secured credit card the – right way – the sooner your credit will improve.