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How to dig yourself out of a bad-credit hole

By Vanessa Page

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Your credit is poor, perhaps because you were irresponsible with credit cards, or because you have never used a credit product. To improve your score, you need to use credit. But with a low score, you may feel like you can't get a credit card.

It feels like an enigma, but you can qualify for credit, even with a poor score, and you can improve your score, even with a credit product that isn't considered top notch.bad-credit

Step one: try a secured card
If you have poor credit, finding a company willing to give you a credit card could be difficult. If you've applied for and been denied a traditional credit card, Oleg Kotiouk, a mortgage broker in Vaughan, Ontario, recommends getting a secured credit card.

With a secured card, you deposit a certain amount of money in exchange for credit. In the event that you default on the card, your deposit is used to pay your balance. Many of Canadian banks' regular credit cards can be obtained as secured cards.

For instance, TD Canada Trust offers a secured option for six of its cards, and you can put a deposit equal to your approved limit on any CIBC card. Check with your bank to see what secured credit card options it offers.

However, beware of cards with high fees. For instance, you can get TD's First Class Travel Visa Infinite as a secured card, but it comes with an annual fee of $120.

Janine Rogan, a Chartered Professional Accountant in the Calgary area, suggests researching the card and looking for high or hidden fees before signing up.

Rogan recommends choosing a card from one of the big banks, since they are more established and are more likely to charge a lower fee and "play by the rules."

According to TransUnion, when you get any credit product, you should double-check that the company reports positive activity to the credit bureaus. Companies are not required to report account information, the TransUnion website states, but most do.

Using your new card wisely
Although people with good and bad credit should be responsible with their credit cards, the stakes are much higher for people with poor credit.

Kotiouk says you should never miss a payment on your secured card, even though your deposit will cover you if you do. Missing a payment or being late on a payment will negatively affect your credit, just as it would with a regular credit card, as payment history makes up the biggest chunk of your credit score.

Rogan says cardholders who are aiming to rebuild their credit should use credit cards over cash when possible, as long as you aren't charging more than you can afford to pay back. This advice has a two-fold benefit. First, by using the credit card and making timely payments, you demonstrate responsible credit card use. Potential lenders like to see that you can use your card regularly and responsibly.

Second, by using the credit card as you would cash or debit, you get in the habit of not using the card as "extra cash" or as an emergency fund, which can foster good lifelong credit habits.

Once your credit improves, Kotiouk says you can graduate from secured credit cards to traditional cards, including those that offer better rewards, higher limits or better interest rates.

Secured cards to try
Here are a few secured credit cards available for a person with poor credit looking to get back on his feet.

  • Capital One Guaranteed Secured Mastercard: This card has an interest rate of 19.8 per cent, slightly below traditional cards. However, the card comes with an annual fee of $59, in addition to the funds required to secure the card's credit. You can get up to a $2,500 credit limit, depending on how much you deposit, but you must deposit at least $75.

  • No-Fee Scotiabank Value Visa: This card comes with a low introductory rate of 3.99 per cent on balance transfers, making it great for someone looking to pay down credit card debt and rebuild credit at the same time. Once the introductory rate ends, the rate is 16.99 per cent. There is no annual fee.

  • Vancity enviro Secured Visa: Instead of a deposit, the Vancity enviro Secured Visa lets you make a qualified investment in a term deposit, savings account or Tax-Free Savings Account (TFSA) in exchange for credit. The card comes with seven different options with various interest rates and annual fees. What's more, enviro Visas earn reward points exchangeable for investment money, travel or merchandise.

See related: How to explain past mistakes when applying for new credit, How to succeed with credit counselling

Published: January 25, 2017