Mar 24, 2022 • 7 min read
Secured credit cards are a great way to build your credit if you don’t have a credit history or are looking to improve your credit score after a financial mishap.
A secured credit card is a credit card where your credit limit is based on a security deposit you make when the card is issued (hence the name). As such, it’s essentially risk-free for the credit card company, meaning they’re able to issue secured cards to people with low credit scores or those who haven’t built a history with credit yet.
If you manage your balance well and make your payments on time, this will be reported to the credit bureaus and can therefore boost your credit score and build a strong credit history.
Whether a secured card will help you build credit faster depends on your own individual credit situation. Secured cards are most often taken out by those looking to establish a credit history or rebuild their credit score after a negative financial event. Secured cards are therefore most useful for people who are new to Canada, those who haven’t used credit before, or those who have undergone a bankruptcy or consumer proposal and therefore have bad credit.
If you’re not able to qualify for a traditional or unsecured card at this time, a secured credit card can help you build your credit faster than the alternative of doing nothing. However, this is assuming that you use your secured credit card responsibly. This means making all your payments on time and using less than 30% of your available credit. If you do, you should be well on your way to building a credit history or repairing a low credit score.
However, if you make your payments late and/or consistently use over 30% of your available credit, a secured credit card could actually hurt your credit score. As such, it’s important to make sure you’re financially disciplined enough to use one before signing up.
There are also loans out there specifically for building your credit. You might consider one of these if you don’t have enough for the minimum required security deposit for a secured credit card. Otherwise, a secured credit card makes a lot of sense, since you aren’t paying any interest as long as you pay off your balance in full by the payment due date each month.
Just how much a secured credit card will boost your credit score depends on your own personal circumstances.
There are two major credit bureaus in Canada: Equifax and TransUnion. Although similar, each has their own unique way of calculating your credit score. One specific action you take might help or hurt your credit score with one credit bureau more than the other.
Likewise, there are also different versions of your credit score. Different lenders use different versions of the Equifax and TransUnion credit report and score, meaning that an action you take that increases your credit score by 10 points on one version might only increase your score by five points on the other.
Ultimately, it’s important not to get too fixated on the amount of points by which each action will help or hurt your credit score. It’s much better to focus on the big picture: the actions that have a positive impact on your credit score over time. This means making your payments on time, keeping your balance below 30% of your available credit limit and only applying for credit when you truly need it.
If you follow these golden rules with a secured credit card, you should be well on your way to boosting and maintaining a good credit score.
Whether increasing the limit on your secured credit card will improve your credit score depends on the average size of your balances over time.
Besides your payment history, the second most important factor that credit bureaus take into account when calculating your credit score is your credit utilization rate. Simply put, your credit utilization is the percentage of your available credit you use over time on revolving credit accounts, such as credit cards and lines of credit.
Credit bureaus and lenders ideally want to see that you’re using less than 30% of your available credit over time. By doing so, you’re demonstrating to lenders that you can use your credit sparingly and responsibly.
However, if you’re consistently using more than 30% of your available credit, that’s when it can negatively impact your credit score and when it might make sense to increase the credit limit on your secured card, remembering to keep your spending the same so that you’re using less of your available credit proportionally. If you increase your spending after raising your credit limit, then your credit utilization percentage won’t actually improve.
For example, let’s say you have a credit limit of $1,000 on a secured credit card and you increase it to $1,500. If your average balance is $400 and you keep it at that level after your credit has been increased, you go from using more than 30% of your available credit to less than 30% of your available credit, and so your credit score should improve.
However, using the same example above, when you increase your credit limit by $500 to $1,500, if you also increase your average balance by $500, you’ll be no further ahead, since you’ll still be using more than 30% of your available credit.
If you always use less than 30% of your available credit limit, increasing your credit limit on your secured credit card won’t have much of an impact on your credit score. It might help you when you make one-time large purchases that push you over 30% of your available credit, but besides that it shouldn’t have much of an impact at all.
Here are the best ways to use your secured credit card to your advantage:
Use your secured credit card wisely
Using your secured credit card wisely means only using it on goods and services that you truly need and can afford to pay off in full once your credit card payment is due, just like you would with an unsecured card.
Make payments on time
Making your payments on time is the most important thing you can do when you have a secured credit card. It shows lenders that you can be responsible with credit.
Keep a credit utilization ratio below 30%
The other important thing you want to do besides making your payments on time is use less than 30% of your available credit. When you do this, it shows lenders that you can be trusted to use credit responsibly.
Monitor your credit report and score
You don’t need to check your credit report and score every day, but it’s a good idea to check it on a regular basis – at least once a month – to ensure your credit score is trending in the right direction. You also want to make sure the positive credit behaviours you're exhibiting with your secured credit card are being reported on both your Equifax and TransUnion credit reports.
Before signing up for a secured credit card, you’ll want to do your homework to ensure you’re making the right choice for you.
Find out more about the security deposit
Before signing up for a secured credit card and making a deposit, you’ll want to find out how much is required for the minimum security deposit, whether the deposit is refundable, and how you would go about making it.
Investigate additional costs and APR
Similar to any financial product that you’re considering signing up for, you’ll want to ask about additional costs and the annual percentage rate (APR) ahead of time. It’s a good idea to compare the additional costs and APRs between at least two or three secured credit cards before making your final decision.
Learn about the information that will be shared with credit bureaus
Similar to an unsecured card, you’ll want to make sure that the secured credit card reports to both Equifax and TransUnion. If it only reports to one or neither of them, it won’t help with building or rebuilding your credit score as much, if at all.
Determine the type of inquiry before applying
It’s more than likely that the credit card issuer will make a hard inquiry on your credit report before issuing you with a card, rather than a soft inquiry. A hard inquiry affects your credit score, so you want to avoid applying for too many credit products in a short space of time.
Signing up for a secured credit card and using it responsibly should put you on track to establishing and maintaining a good credit score. Making your payments on time and using less than 30% of your available credit are great credit behaviours that will signal to lenders that you are financially responsible and can be trusted with credit.
Sean Cooper is the bestselling author of the book, Burn Your Mortgage. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense.
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