Re-establish/establish credit without a credit card
One of the quickest ways to build or re-establish your credit score is to get a credit card. If you had considered a form of debt consolidation services Toronto, there’s a chance that your credit rating was affected. But you may not be able to qualify for a credit card if you don’t have a good rating. Prepaid debit cards may not be the ideal solution if your main goal is to re-establish or build your credit. That’s why secured credit cards were introduced. This type of credit card allows anyone without good credit to be able to slowly build their rating.
Difference between secured and unsecured credit cards
A traditional credit card is like an unsecured loan. You get money from a financial institution to make purchases and then pay back some or all of it at the end of the month. There is simply no security or collateral involved. Due to this reason, the financial institution will only give you an unsecured credit card if you have proven to be credit worthy. You need good or excellent credit to qualify for an unsecured credit card. On the other hand, you can easily qualify for a secured credit card if you have a poor score. The only downside is that they normally come with high fees. You need to understand what you are signing up for before taking a secured credit card.
How secured credit cards work
You may have a lower credit score due to debt consolidation Toronto but this shouldn’t stop you from qualifying for a secured credit card. When you have a secured credit card, you have to make a deposit with the bank that is issuing your card. This money is not refundable meaning that you cannot withdraw it from the bank. The credit limit is mostly set as the amount of money that you have deposited in the card. Issuers usually have minimum and maximum amounts that you can deposit in the bank.
The purpose of this type of credit is to allow you to slowly improve your score so that you can eventually qualify for an unsecured credit card. When you make purchases using the secured card, the amount is deducted from the deposit you had made with the bank earlier at the end of every month. Once you have used the secured credit card for a while, the issuer can close the account or convert it to an unsecured card at which you will be allowed to take out the deposit.
A deposit is required when it comes to secured credit cards because it helps to protect the cardholder in the event that he/she is unable to pay for their purchases. This deposit also acts as collateral that reduces the risk to the issuer when they give credit to an individual who has a poor score. This is exactly why financial institutions don’t have an issue with giving secured credit cards to people who have a poor credit rating. The major difference between a secured card and a debit card is that you don’t load money which you can later withdraw. This is just like an unsecured card in that, you will borrow money whenever you need to make purchases and it will be removed from the amount you had deposited earlier.