Who is a Secured Credit Card Good For?

Secured credit cards are ideal for people who may not have a long enough credit history or a strong enough credit score to be approved for a traditional, unsecured credit card. 

As such, a secured credit card can be very useful for new immigrants who need to build credit in Canada from scratch. They are also a good tool for young Canadians who want to start building a credit score and generate a credit report to help them reach early financial goals (like renting an apartment or getting a car loan).

A secured card can also be a smart choice for anyone who has bad credit and is recovering from a negative financial situation, like bankruptcy or a consumer proposal. 

What Is a Secured Credit Card and How Does it Work?

A secured credit card is a kind of credit card where the cardholder provides a security deposit that the issuer can use to pay off the balance if the cardholder stops making payments. This means the card issuer is taking on less risk, so they are able to lend to people with a lower credit score or those who don’t have any history with credit. If you don’t provide a deposit then you won’t be able to use the card. 

The amount of money you deposit then acts as your card’s credit limit. So, for example, if you provide a deposit of $500, your credit card’s limit is $500 and you can’t charge more than that amount. If you don’t make your minimum payments and stop paying off the balance, the card provider can use your security deposit to pay off the outstanding balance. 

Once you’ve made your deposit, you can then use the card to make purchases, just as you would with a regular credit card. You’ll get monthly statements and will have to make a minimum monthly payment or pay off the balance in full. Any unpaid balance will be subject to interest. If you do cancel the secured card, your lender will return your security deposit as long as you don’t have any outstanding charges.

It’s important to note that you must still make your monthly payments towards the card’s balance, just like you would with an unsecured card. Some people are confused by the use of a security deposit and assume the money is automatically put towards their balance, but that is not the case. You are still fully responsible for making your payments. Your deposit is held in reserve by the lender and only used if you default on your card’s debt. 

How Can I Apply For a Secured Credit Card?

You apply for a secured credit card in exactly the same way you would apply for an unsecured credit card. You research the kind of secured credit card you want (considering things like fees, minimum and maximum security deposit requirements and interest rates) and then apply online or in-person at a financial institution. 

When you apply for a secured credit card, the card issuer may look at your credit score and your credit report. The good news is that, because secured credit cards are designed specifically for those with bad credit or no credit history, most applications are approved (as long as you can supply a security deposit), often without even performing a credit check. 

Aside from a security deposit, to qualify for a secured credit card you’ll generally need to be the age of majority in your territory or province, be able to prove that you have a source of income, and be a resident of Canada. Some card issuers may also require that you are not presently in bankruptcy. 

How Does a Secured Credit Card Help You Build Credit?

A secured credit card helps build your credit in the same way unsecured cards do. As you begin to use the secured credit card, your activity will be reported to Canada’s credit bureaus. Your card activity affects your credit score because your score is made up of five main components: payment history (35%), credit utilization (30%), credit history (15%), credit mix (10%) and credit inquiries (10%). 

Over time, as you make your payments on time and keep your balance below 30% of your credit limit, you’ll positively affect credit score factors like payment history, credit utilization and credit history. The longer your credit account stays in good standing, the higher your credit score will rise. 

As long as you continue to manage your card responsibly, your score will continue to get better and better and your overall credit report will get stronger. Eventually, once you establish a strong credit score, you can even move on to a traditional, unsecured credit card.

What Are the Benefits and Drawbacks of Getting a Secured Credit Card?

Like any tool, the pros and potential cons of a secured credit card depend a lot on how well you use it. Here are some of the benefits and drawbacks of secured credit cards.

Benefits

• Easy Approval: Because they are specifically designed for people with bad credit or no credit history, and because you must provide a deposit, secured cards are much easier to get approved for than unsecured cards, and many issuers may not even require a credit check.

• Reports to Credit Bureaus: Your account activity is reported to credit bureaus and can therefore increase your score as long as you use your card responsibly and make your payments on time. 

• Refundable Deposit: If you don’t have any balance owing, you’ll get your deposit back when you close the credit card account. 

• Helps Build or Rebuild Credit: As long as you make payments on time and pay off the required balance amount each month, you’ll build up a positive credit history.

• Might be Eligible for Rewards: Some secured credit cards may offer rewards like cash back or points.

• Chance To Opt For An Unsecured Card: If you use your card responsibly, you will eventually qualify for unsecured credit cards, which tend to have lower interest rates and more rewards than secured cards.

Drawbacks

• Higher Interest Rate: Many secured cards come with monthly or yearly fees and could have a higher interest rate than regular credit cards, although if you pay off your balance in full each month, you won’t incur any interest charges. 

• Security Deposits: Some secured cards require a minimum security deposit of at least $200.

• Rare Rewards: It can be hard to find a secured card that comes with cash back or rewards.

• Security Deposit Access: You will be unable to access your deposit while your account is open.

• Credit Limit: Your credit limit is restricted to how much you can afford to provide as a security deposit. 

What's The Difference Between Secured and Unsecured Credit Cards?

While secured and unsecured cards have a lot of similarities (for example, you can use both to make purchases and both types of account will be reported to the credit bureaus) there are some key differences.

With an unsecured card, you don’t need to provide a deposit because you are essentially borrowing money from the credit card provider each month to cover your charges until you make your monthly balance payment. To get an unsecured card, a person generally has to have a good credit score, reassuring the credit card provider that they are credit-worthy and can be trusted to make their payments on time. 

However, if you have a history of bad credit, credit card companies will likely be less willing to lend you money because they see you as a credit risk. With a secured card, the lender doesn’t take on any real risk because you must provide a deposit that acts as collateral to ensure payment of your credit account. That’s why it’s much easier to get a secured credit card even if you have minimal credit history or a poor credit score. 

Aside from a security deposit, secured cards also tend to have higher fees and interest rates than unsecured cards, and often have fewer reward options. 

How Long Does it Take to Build Credit With a Secured Credit Card?

Though building strong credit is not something that happens overnight, with diligence and patience you can start to see small changes relatively quickly. If you manage your credit responsibly, make all your payments on time and keep your credit utilization below 30%, your credit score may start to rise within the first six months. 

It’s important to keep in mind that how fast your credit grows will depend on what your credit history and score were to begin with. If you have ever declared bankruptcy or have a long history of shaky credit, it could take anywhere from 12 to 18 months before you really start to notice a significant improvement in your score. But hang in there! As long as you maintain good financial habits, your score will continue to improve.