Road to Better Credit: Rebuilding your credit history
Welcome back to the Road to Better Credit. In this post, the last of our four-part series, we’ll offer solutions you can use to rebuild your credit history with secured credit options.
When it comes to accessing credit, those who do not have a credit history and those who have had past credit challenges are in a similar predicament.
Those applying for credit for the first time can’t demonstrate that they can effectively manage credit when it hasn’t been extended to them. Those who have past credit issues may also find being approved for credit to be a challenge, even when they have been working hard to resolve past credit issues. Both may be affected by credit circumstances out of their control, like a prolonged illness job loss, or moving to Canada from another country.
Even a slightly-less-than-perfect credit history can have a tremendous impact on your financial well-being. Common credit arrangements such as car loans or mortgages that many take for granted can be out of reach if your credit reveals past challenges with using credit. Even if your credit score is just average, you may be approved for additional credit, but at a higher interest rate to account for the perceived increase in risk. Over the life of a mortgage, for instance, this could result in tens of thousands of dollars in extra costs.
Having a good credit history has tremendous advantages, but how do you go about mending past credit issues when you no longer qualify for credit? One of the most common ways is to use a secured credit card. Here’s how it works.
Unsecured versus secured credit cards
Before we get into the mechanics of how a secured credit card can help repair your credit history, let’s first explain what we mean by a “secured” credit card. While there are many credit cards to choose from, all offering various incentives and benefits, all credit cards fall into two major categories: secured and unsecured. Unsecured credit cards are the most common type of credit card, and this is what most people tend to think of when referring to a credit card.
An unsecured credit card is not tied to any form of collateral, and by charging goods or services to the credit card, you are essentially borrowing money from the card issuer. The amounts charged to the credit card must be paid back based on the terms you agreed to when you accepted the credit card.
However, a secured credit card is backed by collateral – typically in the form of a cash deposit – that you provide to the secured credit card issuer. If you fail to make the required payments, the card issuer will deduct from these funds to recover their costs.
Rebuilding your credit history
The Home Trust Secured Visa credit card is a highly effective way to repair past credit history. Because a deposit secures it, most applications are approved. Even if you’re recovering from a bankruptcy or a consumer proposal, you can still enjoy the convenience and benefits of a Visa credit card. At the same time, your account’s monthly status is reported to both credit bureaus in Canada, Equifax and TransUnion, which is a key factor in rebuilding your credit history.
Learn more about ways to improve your credit history by reading the other posts in our “Road to Better Credit” series: Understanding credit scores; Avoid applying for too much credit, and Understanding the impact of debt on credit ratings, and visit our website to learn about secured credit card options to rebuild credit.
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