What is a Secured Credit Card?
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Discover the methodologyDid you know that there are 30 million active credit accounts throughout Canada? While not all credit accounts are created equal, what type of credit history you have will directly impact how you can participate as a consumer.
While the goal is to establish and maintain a good credit score and history, we understand that sometimes circumstances occur that negatively hurt your credit score, be it a bankruptcy or defaulting on a loan.
If you are a person with a bad or less than ideal credit score, you are probably wondering what steps you can take to start improving and rebuilding your credit. One way to do that is by obtaining a secured credit card.
We have put together a guide to help you better understand what a secured credit card is, how it works and how it could be a tool to help increase your credit score.
What is a secured credit card?
A secured credit card is a type of credit card that requires you to put down a cash security deposit when you open the account. The deposit makes it less risky for the credit card issuer to issue you a line of credit. If you do not pay your bill, the issuer is protected, as they can take the money from your deposit. This is why secured credit cards are available to people with bad credit and people with little or no credit.
Except for requiring a security deposit, a secured credit card otherwise acts operationally just like a traditional card. You would be able to run your card where cards are accepted and have access to banking features such as online banking. However, the available features will be dependent on the bank.
One of the biggest advantages of a secured credit card is it allows those who may not qualify for a traditional credit card to get a card. It also helps build or improve a credit score.
Good to know
Secured credit cards are easy for foreigners and international students who may not have credit built up in their country of residence to easily obtain.
Ready to compare offers on secured credit cards? You can in just seconds and apply for one that matches you.
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How do secured credit cards work?
One of the most common questions consumers ask is how can you get a credit card if you have bad credit? You may be relieved to find out that there are options available to you. One solution would be to obtain a secure credit card. Most people are eligible for them even if they have a bad credit history.
Secured credit cards exist to help people rebuild their credit. When you take out a secured credit card, you are required to put down a deposit that equals the amount of available credit. If you take out a secured credit card with a $250 credit limit, you would be required to put down a deposit of $250. This is so that in the event you are unable to pay your bill, the bank or lender can recoup the payment you missed.
On the flip side, if you have good payment history and are using your secured card responsibly, it will help to increase your credit score.
Benefits of secured credit cards
- Ability to rebuild credit
- You are in control as you can set your credit limit
- Approval even with a bad credit score
- Approval regardless of personal income
Disadvantages of secured credit cards
- Must put down a deposit to obtain a secured credit card
- High-interest rates
- Few or no rewards at all
- Fewer or no perks compared to traditional credit cards (rental insurance, travel benefits, cashback rewards)
Secured credit cards vs. prepaid cards
If you have heard of secured credit cards, you may have also heard of prepaid cards. Keep in mind that they are not the same. We break down the differences between the two so you can be sure you are applying for the card best suited for you.
| Secured Card | Prepaid Card |
|---|---|
| Buy now, pay later | Pay now, buy later |
| Affects credit | Does not affect credit |
| Credit check required | No credit check required |
| Tool to rebuild credit | Tool to spend money |
Secured vs Unsecured Credit Cards
One of the biggest differences between secured credit cards and unsecured credit cards is that a secured credit card requires a deposit to secure the card. Fortunately for the borrower, there are also some similarities.
A secured credit card is easy to be approved for and while it requires a security deposit and lacks rewards, its ultimate goal is to help you build up your credit so that you can qualify for an unsecured credit card. Once you have graduated from a secured credit card to an unsecured credit card, a deposit will no longer be required and you will have access to perks such as lower interest rates and rewards.
| Credit card comparison | Secured Credit Card | Unsecured Credit Card |
|---|---|---|
| Easy to be approved | ||
| Security deposit required | ||
| Builds your credit score | ||
| May have an annual fee | ||
| May have a setup fee | ||
| Earns rewards | ||
| Additional benefits (e.g., travel insurance, extended warranty) |
How can using a secured credit card improve my bad credit score?
One of the biggest advantages of a secured credit card is that it will help to improve a less than ideal credit score.
When you are seen as a risk to lenders, qualifying for something as simple as a credit card can be an uphill climb. However, when you open up a secured credit card, you put down an upfront security deposit that will equal or exceed your credit card limit.
If you use your card responsibly and pay at the very least the minimum payment on time, this will help you rebuild your credit as it will show lenders that you are responsibly using your credit.
Tips for building credit with a secured credit card:
- Pay in full
- Pay on time
- Have a low credit utilization ratio (<30%)
- Actively use the credit card, but do so responsibly
How do I apply for a secured credit card?
If you want to apply for a secured credit card in Canada, there are certain criteria you must meet:
- Be a permanent resident of Canada
- Be the age of majority in your province
- Cannot be currently in bankruptcy
- Pay a security deposit from your Canadian count in your name
- Cannot be a resident of Quebec
If you meet the criteria required to apply, it increases the likelihood of being able to obtain a secured credit card.
Ready to apply for a credit card? You can quickly compare the best offer and apply:
Compare dozens of Canada's top credit cards now
What is the credit limit on a secured credit card?
Your credit limit on a secured credit card is generally equal to the amount you put down as a security deposit. For example, a TD Cash Secured Credit Card would allow you to pick a credit limit of between $300 and $5,000. Keep in mind that this means you need to put that amount down as a security deposit.
The credit limit you can put down on a secured credit card will vary on the company and the amount of risk they are willing to take on.
What is the best secured credit card in Canada?
There are many secured credit card options out there for you. Use our credit card comparison tool to find the one best for your needs. Here are a few of our recommendations:
| Credit Card | KOHO | Refresh Financial Secured Card | Plastik Secured Visa Credit Rewards Card | Neo Secured Card | Capital One Guaranteed Secured MasterCard |
|---|---|---|---|---|---|
| Annual Fee | Free | $12.95; +$3 monthly maintenance fee | $48; +$6 per month | None with Standard Plan | $59 |
| Interest Rate on Purchases | 0% | 17.99% | 17.99% | 19.99%-24.99% | 19.80% |
| Cash Advance | 0% | 17.99% | 21.99% | 19.99%-24.99% | 21.90% |
| Balance Transfer | 0% | 17.99% | - | 19.99%-24.99% | 19.80% |
| Rewards Type | Cashback Basic | None | Reward Points | Cashback | None |
How do I get my deposit back with a secured credit card?
Once you have successfully made the switch from a secured credit card to an unsecured card, you may be wanting to know how to go about getting your deposit back. To get your secured credit card deposit back, you will need to pay off your balance or close your credit card. You can also get your deposit back when the issuer upgrades you to one of their unsecured credit cards. Secured credit card issuers will eventually return your security deposit by sending the funds to your bank account, issuing a check or providing a statement credit.
How do I move from a secured to an unsecured credit card?
Once you have used your secured credit card responsibly (making all the monthly payments on time and maintaining a credit utilization of 30% or below) for approximately 12 to 18 months, you can start thinking about making the move from a secured credit card to an unsecured credit card. Here are a few steps you can take to get an unsecured card:
- Contact your card provider to inquire about making the switch. It is generally easier to make a switch with a provider you already have a history with.
- Change credit card providers. Look around to find a credit card with the features that best suit your spending habits.
- Apply for a new card once you have found a card.
- Once approved for an unsecured card, cancel your secured credit card.
- Get your deposit refund from your secured credit card.
Whether you are looking for a secured credit card or are ready to move onto a traditional card, HelloSafe makes it easy to find the best credit cards in seconds.
Compare dozens of Canada's top credit cards now
