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Can I Buy a House with Bad Credit?

March 14, 2021 by Ben 2 Comments

Borrowers with a good credit score, enough cash for a down payment and high incomes have access to a variety of loan products with attractive terms and rates. We are not in the same boat, however, and many are facing financial hardship, whether it is the global pandemic, prolonged illness, divorce, or job loss. Fortunately, there are ways to qualify for a mortgage loan even with poor or fair credit as well as alternatives to consider. Here is what you can do to access financing, the pros and cons to weigh in, and other options to look into.

Find Your Credit Score

This is the first step, and it will show you whether your score is as bad as you think. Scores range from 300 and 900 where 680+ is considered good, 600 to 679 is fair, and below 599 is poor. Request a credit report from TransUnion or Equifax to find out how you fare. If you don’t need a detailed report, you can also use an online tool to check your score. Once you’ve done this, you will know what loan products you are likely to qualify.

If you have bad credit, you may still qualify but the interest rate can be in the 10 – 18 percent range which is quite high. With a good score, you can expect to get a mortgage with an interest rate of around 2.5 percent. Note that banks offer lower rates compared to private lenders and trust companies.

What to Do to Get Mortgage Financing

To benefit from lower rates, it pays to try to improve your credit score, especially if you don’t feel any urgency to buy a property. The main things you can do are to pay your bills on time and keep credit card balances low. It is important to pay your bills in a timely manner, including gas, electricity, and water as well as any debt payments that you have. Your FICO score which is what most banks use comprises 5 elements – new inquiries (10 percent), payment history (35 percent), credit mix (10 percent), age of accounts (15 percent), and credit usage (30 percent). As you can easily see, your payment history is one of the most important factors. Not everything goes on your file, however, examples being:

  • Declined applications
  • Driving and parking fines
  • Savings accounts
  • Salary or wages
  • Soft searches
  • Criminal record

You also need to stay under your current credit limit to show finance providers that you are good at handling debt. It is important to keep balances low to reduce your credit utilization ratio. To calculate it, add all outstanding balances that you have and divide them by your total limit. As noted, credit usage makes for 30 percent of your FICO score, and you must try keep your utilization rate low. A good credit utilization rate is anything below 30 percent, showing financial institutions that you are a responsible spender.

You may also want to keep any old accounts that you have as they account for 15 percent of your score. If you close old card accounts, this will affect (shorten) your credit history so it is better to keep them even if you rarely or never use them.

Another way to improve your score is to apply for a secured card as long as your financial institution reports to the main bureaus. You will need to make a deposit which is usually equal to or higher than your credit limit and can vary from $200 to $3,000. This is a form of guarantee for your bank in case you default on your payments. While finance providers require a deposit, secured cards work pretty much like standard ones in that you can make in-store and online purchases, book flights and hotel stays, etc. Getting a secured card makes sense only if you make small purchases and pay the balance in full. This will help keep your credit utilization ratio low. If you make late payments, on the other hand, you can get stuck paying a lot in interest.

Finally, if you have high interest debts such as payday loans or credit cards, what you can do is transfer them to a personal line of credit. As they come with lower rates, you will save on interest charges. Moving high interest balances to a balance transfer credit card is also a way to take advantage of promotional rates which can be low or zero over a period of 6 to 12 months.

Pros and Cons of Buying a House with Bad Credit

It may come as a surprise but there are some advantages to buying a house with fair or bad credit, one being that it will help you build equity. If home prices are stagnated or depressed, you will not be able to build equity but will benefit from price drops. In fact according to the Canada’s housing agency home prices are expected to decline by 25 percent in oil-producing provinces and between 8 and 19 percent elsewhere.

There are downsides to buying a home as well, one being that you are likely to get a smaller loan than what you need. Financial institutions look at your debt-to-income ratio to determine the amount that you qualify for. If you have a lot of debt, then you will not get an offer worth accepting. Buying a house only makes sense if you have saved enough to make a sizable down payment. This not only shows banks that you are a responsible buyer but may help you to get a decent-sized property. Even so, make sure you will be able to pay essential expenses such as health and auto insurance coverage, outstanding debt, utilities, groceries, gas, child care, and property tax.

There are also alternatives to look into like borrowing from your insurance policy or retirement plan, seller financing, and getting a co-signer.

Filed Under: Finance, Loans, Mortgages Tagged With: bad credit, bad credit mortgage, credit score, mortgage

Best Secured Credit Cards in Canada

January 10, 2021 by Ben 12 Comments

Credit cards are useful in that they help build good credit, book hotel accommodation, rent cars, and purchase goods and services online. Interest rates have been low since the onset of the Covid-19 pandemic but some people with bad or tarnished credit may not qualify for regular cards. This is where secured cards come handy in allowing users to build good credit and shop in-store or buy products online.

Best Secured Credit Cards for Canadians

Major banks no longer offer secured credit cards which means that choices are more limited for Canadians. Still there are some good offers to look into if you have no or blemished credit like the cards that Home Trust and Refresh Financial feature.

Refresh Secured Card

Refresh Financial offers a secured card that helps users to get a credit boost by making timely monthly payments. There is even a feature that allows you to get an idea how your repayment and spending patterns affect your credit rating. You can use their handy online calculator to check your utilization rate. For example, if the balance is $100 and the limit $600, then you have an optimal credit utilization rate (17 percent). There are other benefits for users, one being that payments are reported to both bureaus. Another is that the higher your credit score is, the lower your interest rate.

  • Interest rate: 17.99 percent
  • Maintenance fee: $3/month
  • Annual fee: $12.95
  • Credit limit: $200 – $10,000

Home Trust Secured No-Fee Visa

Also a good choice to fix your score fast, the Home Trust Secured No-Fee Visa has been voted 2020’s Best Credit Card for Rebuilding Credit. You will not only benefit from a zero annual fee but you only pay interest on your outstanding balance. The card allows you to make purchases and pay online up to your deposit limit. Home Trust also allows you to choose a deposit limit that works for you, and it can be as low as $500 and as high as $10,000.

  • Purchase interest rate: 19.99 percent
  • Annual fee: none

Home Trust Secured Visa

This is a low interest option to rebuild credit as long as you keep your account active and make timely payments. There are many benefits for holders such as the option to set your limit, set accounts online, pay utility bills, and make purchases online. The card also comes with purchase security coverage so that all eligible purchases are insured against damage or theft for 90 days. You can use the card to make payments in more than 200 territories and countries and with merchants that accept Visa cards.

  • Interest rate on purchases: 14.90 percent
  • Fee: $5 per month or $59 annual fee

What Is a Secured Credit Card?

Secured cards work much like standard ones in that they allow holders to build a positive credit history and make purchases, whether they buy groceries, book flights or cruises, or repay other outstanding balances. The most common varieties are American Express, MasterCard, and Visa. Whatever the brand of choice, users have to make a deposit which is used as a safeguard by the issuer as to cover any outstanding balances in case of missed or late payments.

Are Secured Credit Cards for You?

If you have bad credit and can’t qualify for a standard unsecured card, this is a good option to rebuild credit by making small purchases and paying the balance in full and on time. Using the card responsibly also means that you won’t incur interest payments. Interest rates are higher on average, and paying more than the minimum will save you a lot of money.

Benefits of Secured Credit Cards

The main benefit of secured cards is that they offer the chance to rebuild credit and apply for a wide variety of products with preferential terms and affordable rates. Your account history is forwarded to the major bureaus and goes toward your credit report. Not only this but you can use the card to shop online and make secure payments. Some issuers also offer added incentives such as upgrading and rewards points.

Security Deposit, Credit Limits, and Card Fees

When you get approved for a secured card, you will be asked to make a cash deposit which is equal or larger than your credit line. This means that credit limit is based on the deposit made. Some issuers offer the option to increase the credit line after a certain period provided that you use the card responsibly. Secured cards typically come with annual fees but there are some issuers that advertise zero fees.

Alternatives to Secured Credit Cards

If you can’t get a secured card, one option is to apply for a prepaid card that you can use to pay for services and goods. It is not linked to a credit, checking, or savings account and allows you to keep cash for later use. A major drawback is the fact that your payment history will not be reported to the credit bureaus. Still, they offer some benefits such as ease of use and safe and secure payments. Prepaid cards are easy to reload, and there are different ways to do this – in person, online, by direct deposit, or via bank account transfer.

Getting an unsecured card for bad credit is also an option, albeit the choice is more limited. Some issuers offer unsecured cards to Canadians with fair and good credit, regardless of their annual income. Added benefits for customers are low annual fees and interest rates, no fees for supplementary cardholders, and zero fraud liability.

A third option to look into is payday loans, and there are some benefits to consider such as fast and easy application, borrowed amount based on income level, and no credit check guaranteed approval. Still, getting a payday loan can be risky because of the very high interest rates and short terms that finance providers offer.

Other alternatives that financial institutions offer include guarantor and short-term loans, secured loans, overdrafts, and debit cards. The choice of product depends on your credit score, income, occupation, and financial circumstances.

In general, getting a secured card is a good choice for customers with little or no credit exposure, including young people and newcomers to Canada. It is also an option for borrowers with blemished credit who are refused a loan or credit card because they have past delinquencies, recent missed or late payments, or for any other reason. Borrowers with low or no income and high balances on cards and loans are also likely to get their application denied. A secured credit card is a good alternative for borrowers with a tarnished credit history who need a fresh start and a card to make daily purchases. We all know what having poor credit means – higher home and auto insurance premiums, difficulty securing a home lease, higher loan rates, and even strained personal relationships. A secured credit card offers users the chance to master good money management skills by borrowing responsibly.

 

Filed Under: Credit Cards, Investment, Loans, Mortgages, Uncategorized Tagged With: bad credit, bad credit credit cards, credit cards, guaranteed secured credit card, secured credit cards

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