If you have bad credit, you still have several options to take advantage of rewards programs while rebuilding your credit.
Three of Canada's "Big Five" banks offer secured versions of most of their credit cards -- rewards credit cards that require you to put down a security deposit as collateral for your balance. Additionally, some credit unions offer regular rewards cards to their members, with less-stringent qualification rules.
CreditCards.ca vetted the best rewards cards available to credit-challenged consumers, and determined four winners. None of the following cards charges an annual fee.
1st place: RBC Royal Bank Cash Back
This secured card initially generates 2 per cent cash back on grocery spending, plus 0.5 per cent on other purchases. Based on $10,000 in spending equally split between groceries and other items, cardholders receive $125 in cash back. Cardholders can redeem their rewards whenever their cash-back balance exceeds $25, or wait until the accumulated credit is applied on their January statement.
RBC Cash Back MasterCard is one of the few secured cards that automatically place the applicant's deposit into a Guaranteed Investment Certificate (GIC) account, which pays interest to cardholders.
This no-annual-fee card also comes with complimentary insurance benefits, namely:
- 90-day purchase security that protects against loss, theft or damage.
- Extended warranty protection that doubles the original manufacturer's warranty for up to one year.
Con: Reward rates are somewhat confusing. The 2 per cent cash-back applies to the first $6,000 of grocery store purchases, but then reduces to 1 per cent for food spending over $6,000. For other purchases including preauthorized bill payments, the cash back rate increases from 0.5 per cent to 1 per cent after the $6,000 threshold is surpassed.
2nd place: TD Canada Trust Rebate Rewards
This secured rewards card offers cash back at a rate of 0.5 per cent for the first $3,000 in net annual purchases plus 1 per cent on total spending over $3,000.
If a cardholder were to spend $10,000 annually, the cash rebate would equal $85 ($15 for the first $3,000 in charges plus $70 for the next $7,000). Cash rebates are directly credited to accountholders in January, and are constrained by a $25,000 annual spending maximum. However, that rewards limit is probably more of a concern for big spenders, rather than people rebuilding their credit.
This card's two free benefits are preferred car rental rates and guaranteed hotel reservations for late arrivals.
Con: TD's standard practice is to keep security deposits from two to three years, during which time the money can neither be withdrawn nor applied to outstanding balances.
3rd place: BMO Air Miles MasterCard
A secured version of this BMO rewards card offers a wide choice of rewards from Air Miles, Canada's largest loyalty program. Incentives range from instant cash redemptions at participating retailers to travel, entertainment and merchandise rewards.
Cardholders earn one reward mile for every $20 in purchases. In turn, 95 air miles can be converted into a $10 cash redemption -- so $10,000 in annual spending represents $53 worth of redeemable air miles at checkout. Together with the standard Air Miles collector card, cardholders can double their reward tally to about $106.
BMO Air Miles MasterCard provides free 90-day purchase protection and one-year extended warranty benefits.
Con: A $29 over-the-limit penalty applies when the card's credit maximum is breeched.
4th place: Vancity enviro Classic Visa
This unsecured credit card is specifically for Vancity credit union members. Cardholders receive one reward point for every $2 charged. Points can be applied towards financial products as mortgage payments, savings account deposits and Registered Retirement Savings Plan (RRSP) contributions. Other redemption options include travel and merchandise rewards or charitable donations.
Vancity enviro Classic Visa awards one point per $2 spent on the card. After $10,000 in annual purchases, cardholders are entitled to about $50 in reward credits.
Vancity cardholders enjoy the richest set of no-charge benefits in this comparison. In addition to purchase security and extended warranty protection, up to $200,000 in travel accident protection is free for cardholders, their spouses and dependent children.
Con: Canada's largest credit union, Vancity restricts membership to British Columbia residents.
Maximizing personal profits while rebuilding credit
Beware of carrying a balance from month to month, the four credit cards above have relatively high APRs that range from 19 to 19.99 per cent. Some secured cardholders learn the hard way they're liable for severe interest charges and penalties when payments aren't made in full each month -- just as they would for unsecured cardholders. Card issuers treat security deposits independently from required monthly payments and interest charges, which enables financial institutions to seize that collateral after the account becomes delinquent.
For most secured credit cards including those that TD issues, cardholders have to close their account in order to access the deposit before the preset 2 or 3-year term expires. Doing so wipes out any accumulated rewards. Consumers can ask their local bank manager to move their deposit into a GIC or savings account, which shortens the collateral's locked-in period.
But the wisest strategy for using ‘bad credit' rewards cards is to focus on paying your account balance in full every month, thus improving your credit score. That discipline enables you to optimize rewards, without incurring interest charges and fees that outweigh the incentives you'll receive.