I’ve been getting a lot of questions from readers of the “After Bankruptcy Canada” blog regarding how to establish credit after bankruptcy, or trying to get other types of credit. First of all, thank you very much for reading my articles and submitting your questions. I may not personally reply to all questions, but I’m doing my best to answer each and every one of them in the format of an article.
Some questions come up again and again. The most common one is “how do I re-establish credit after bankruptcy?” or “what kind of credit can I get after being discharged from my bankruptcy” or even “what else can I do if I don’t have enough money for the secured credit card yet?” – or some sort of variation on these questions. They all lead back to getting a secured credit card.
If you’re an astute reader of this blog, you’ve noticed that I often make references to the importance of getting a secured credit card from Home Trust Visa and/or Peoples Trust MasterCard. One of the first articles I wrote for this blog was on my trial and error journey of discovering how to get a secured credit card after being discharged from bankruptcy in Canada. I also tell you the difference between a prepaid “credit” card and secured credit card.
Prepaid vs Secured Credit Cards
First, let’s just review the basics. Some of you are, or were using a prepaid credit card. Don’t worry, I made this mistake too. Not knowing the difference, and needing a way to pay some bills online, I quickly applied for and received a Titanium MasterCard from Money Mart (Insta Chèque in Québec). There are others out there too. But, if the “credit” card you are getting is called a “prepaid” MasterCard or Visa, forget about it! With a prepaid card, you give the company money, let’s say $300 and you instantly get a $300 credit limit on your card (providing you have applied for and received your prepaid card already). “That’s great!” you say. Or is it? A prepaid card will NOT report to your credit profile and thus, will NOT do anything to rebuild your credit. If your credit limit is variable, meaning it goes up when you give them money and goes down when you spend the money, it’s probably a prepaid credit card.
You want a SECURED credit card. This means you will have to send in, or save up at least $500 for a security deposit to. The credit limit will always remain at that amount. You cannot decrease it, but you can increase it by sending in more money that you clearly indicate is to be applied to increase your credit limit (as opposed to making a payment). Unlike traditional unsecured credit cards you had before your bankruptcy, you typically cannot “overpay” a secured credit card to temporarily increase the credit limit. A credit limit is permanently increased when you send in another security deposit. In Canada, Home Trust Visa and Peoples Trust MasterCard are the big players. I have one of each. Some Canadians also get a Capital One secured MasterCard, but I have heard mixed reviews on it. But, since I don’t have a Capital One secured credit card, I can’t comment on it.
A Prepaid “credit” card will NOT report to the credit bureau(s). A Secured Credit Card WILL report to the credit bureau(s), which is good because it will help rebuild your credit (as long as you don’t miss a payment or be late with one – avoid that at all costs, especially if you still have a bankruptcy appearing on your credit report which is typically for 6 years after your discharge).
To recap, to get a secured credit card, you need to send in at least $500 to along with your application. There’s an annual fee which will be charged to your first month’s statement (usually around $50), plus of course, any purchases you make. When you get your bill, you must pay it. The initial deposit you sent in cannot and will not be touched until you decide to close the account. So if you get your monthly statement and it shows you charged $300 on it, you must pay $300, or at least the minimum payment. To keep a low debt to credit ratio, I recommend you pay in full each month. Best of all, a good secured credit card like a Home Trust Visa or Peoples Trust MasterCard will report to the credit bureaus each month. And that will work towards rebuilding your credit. It will not be indicated as a prepaid card, unless you tell someone or a lender is aware of the issuer.
Of course, if you miss a payment, that also gets reported to the credit bureau. And you don’t want that, because you need to prove to everyone that you are responsible. Many lenders will turn down credit applications if you have any late payments after your bankruptcy discharge. So if you’ve got a bankruptcy appearing on your credit report, you need to do everything right. Pay your bills on time, or better yet, early! As soon as you get the statement (but not before or it will report a zero balance which will make it look like you aren’t using credit, and that won’t help rebuild your credit).
Generally, acceptance for a Secured Credit Card is virtually guaranteed to any Canadian citizen at least 18 years old or more and who is not currently an undischarged bankrupt. So as long as you’re at least 18, have been discharged from your bankruptcy, have a source of income and have at least $500 for the minimum deposit, your approval is pretty much guaranteed. Many people new to the credit world, such young adults who have never obtained credit and cannot be approved for unsecured credit will get a secured credit card. New Canadian citizens, who may have an established credit rating from the country they used to live in, must establish their credit worthiness in Canada and will often use a secured credit card too. At the time of this writing, The Peoples Trust MasterCard is available across Canada, but the Home Trust Visa card has some restrictions. I could not get one when I was a Quebec resident, but was able to get one of their cards as soon as I moved to Ontario.
What If I Don’t Have $500 To Get A Secured Credit Card?
Now that you know the difference between a prepaid and a secured credit card, you know which one to get. But what if you don’t have the minimum security deposit of $500 to get a secured credit card? SAVE UP! Get an extra part time job. Sell some unwanted items. Have a garage sale. Ask for money as a birthday or holiday gift. Use your tax refund or GST refund cheque. I don’t recommend getting a loan from a friend or family member. Sometimes these kinds of loans aren’t very high priority to pay back and cause resentment, hurt feelings and broken friendships or tarnished relationships.
If you have a hard time saving money, set aside the money you are saving for your secured credit card in a separate bank account. Or hide it under your mattress if you think that’s a safe place. Once you have a bit put away, you’ll feel motivated to save money. Before you know it, you’ll have almost enough and will be eager to put as much as possible towards that $500 deposit. And remember, once you send in your deposit and you get your secured credit card in the mail, you will once again have access to those funds. So, you can pay your cell phone bill or buy gas for your car right away using that money. Just remember to make sure you can pay the bill at the end of the month! Or at least the minimum payment.
Get Or Work Towards A Higher Credit Limit
What? This may sound strange to some of you. I was on a tight budget and had to save up for a few months to get my first secured credit card. Now I’ve got two of them (A Home Trust Visa and Peoples Trust MasterCard).
Whenever I can, I send in more money to increase the credit limits. Why? Because it helps with the ratio of debt to available credit. For example, if you have a $500 limit on your credit card and your car breaks down. Let’s say it costs $400 to fix your car (because car repairs are rarely cheap). You’ve now used $400 of your available $500 credit limit, or 80% of your available credit. If you had a $1000 credit limit, that $400 charge would only have used up 40% of your available credit limit. Depending which credit expert you ask, it’s generally advisable to charge no more than 30% to 40% of your available credit, because this gets reported to the credit bureau(s) and is used to calculate your FICO credit score.
Of course, do what you can. If you have to save up for a few months to get the minimum $500 deposit, at least do that and get your secured credit card as soon as possible to start rebuilding your credit. Face it, you probably won’t have much luck getting credit anywhere else right after being discharged from your bankruptcy – especially in this tough economy with tighter credit guidelines.
Keep saving up to send in more money for a higher credit limit. I usually send in $500 at a time, but once you have your account set up, you can send in additional funds to permanently increase your credit limit. Based on information on the Peoples Trust website at the time of this writing, additional deposits must be in increments of $100. They don’t indicate a maximum, however Home Trust Secured Visa cards allow a credit limit of up to $10,000 (and they do not specify any required increments).
How Much Is Enough?
At some point, you will reach a happy medium. For example, if you earn $20,000 per year, you don’t want to have a $10,000 credit limit, even if someone gives you $10,000 as a gift. The theory being that you could “max out” your credit card and not have the disposable income to pay it off. This will be important whenever you seek new, unsecured credit later on.
On the other hand, a $500 credit limit is not very realistic. It’s easy to max out, or come close to maxing out. Plus, it doesn’t look very serious when you go to apply for new, unsecured credit later. You need to show that you can manage a higher credit limit over time. So, whenever possible, gradually, or immediately increase your credit limit. For most people, anywhere from $1000 to $2500 is a good amount to have, depending on your annual income.
Don’t Wait Any Longer!
If you don’t yet have a secured credit card, GET ONE! It’s probably the only credit you’ll be able to get, especially if your bankruptcy discharge is very recent. Time heals many things. Get started with at least one secured credit card. Increase the credit limit to a realistic amount based on your annual income. Get a second secured credit card as soon as you can to have another line of credit reporting to your credit profile at Equifax and TransUnion. After at least one year of timely payments (or more, two years is even better), you will be in a much better situation to seek other credit, such as an unsecured car loan or even something as simple as a cell phone without a security deposit.
Once again, the first thing any recently discharged Canadian should do (after checking his or her Equifax and TransUnion credit reports for errors and updates) is get at least one secured credit card as soon as possible, even if it’s for the minimum $500 security deposit. Good luck my fellow ex-bankrupt Canadians. Remember, there is hope!
PS: I’d love to hear how it’s going for you with your new secured credit cards after your discharge from bankruptcy. Or, unsecured credit cards if you were so lucky to get any! I don’t want specific details that will identify you, just the basics. Please use the “Contact Us” form. Thanks! 🙂