Secured credit cards

If you have a poor credit score, use a secured credit card to improve it.

By   |   Verified by Yvonne Taylor   |   Updated 21st October 2020

Comparing secured credit cards

Refresh Secured Card

Refresh Secured Card

Highlights

  • Low annual fee of $12.95 p.a.
  • Get a credit limit starting at $200 up to $10,000. Secure your credit limit with a required deposit then build your credit by making the same everyday purchase you already make.
  • No credit check required.

Overview

A secured credit card is a type of credit card that's backed by a deposit you make with the card issuer which acts as collateral for the card account. This deposit provides the issuer with security if you miss your payments. Typically, secured credit cards are for people who have limited credit history or are subprime borrowers.

The primary advantage to using secured credit cards in Canada is that it can increase your credit score. Of course, to improve a credit score payments need to be made on time each month.

Interest rates and repayments

Interest rates on secured credit cards are typically higher than those on "normal" unsecured credit cards. These higher interest rates are just one of the reasons it's so important that you pay off your balance in full each month. Sticking to a repayment schedule that works for you is essential in building your credit and transitioning over to an unsecured credit card.

Annual fees and other fees

There can be an annual fee on your card, typically around $50, although some cards are more expensive. You can try to avoid this by looking for a secured card with no annual fee. In some cases you may also have to pay a one-off set-up fee, such as 3% of your credit limit.

Credit history and score

With secured credit cards your credit score isn't as much of an issue as it is with unsecured credit cards, because the lender will rely on the amount of money you put down as a deposit as a guarantee of repayment, rather than just relying on your credit score as an indication.

Secured cards and credit repair or establishment

If your credit score has been damaged because of missed payments or insolvency, putting down a security deposit for a secured card is a great way to get back on track. It's also a good route for establishing credit history for a new migrant. While the annual fee and deposit can be expensive depending on your financial situation, if you set a realistic budget this type of credit card is a solution to repairing or establishing your credit.

You'll need a card for online payments

Since you need to have cash on hand to make the deposit required to secure your card, and if you're not particularly worried about your credit score, you may be asking why you shouldn't just use the cash for your expenses and forget about a credit card. But you can't use cash for online shopping and bill payments. You're going to need a card for that, and a secured credit card can have benefits that a debit card or prepaid card won't deliver.

Alternatives to a secured credit card

If you just don't want to use a credit card or that option isn't available for you, there are alternative methods of payment you can use. Each of these options can be used in stores and online, and they are great for people who don't want a credit card.

  • Debit card. A debit card is the most popular alternative to a credit card because nearly anyone who has a bank account is given a debit card linked to the account. With debit cards you don't need to worry about your credit score, credit limit, a security deposit, or your credit history. The primary difference between a credit card and a debit card is that when you use a debit card you're using money you already have in your bank account instead of using a credit balance you were approved for based on your credit score.
  • Prepaid card. Prepaid cards are a good option if you want to limit how much money the card can access from your bank account. You just load the card with a balance and can use the card until the amount is spent. You may be able to then top up the card with further cash. These don't require any sort of security deposit and typically don't have any sort of fee attached to them.
  • Secured personal loan. Borrowing a fixed sum in the form of a personal loan is a good alternative for major purchases, such a car or home renovations. But if your financial history means that you would not qualify for an unsecured credit card, you probably won't qualify for an unsecured personal loan. You'll have to offer some form of collateral to secure your loan, such as a car or other property.

Learn about secured credit cards

What is a secured credit card and how do they work? Find out below.

  • Pros & cons

  • Tips

  • FAQs

Enjoy some complimentary perks

As with unsecured credit cards, it's possible to get a secured credit card with a few free or low-cost benefits. Depending on the card this could be a low-interest balance transfer option, free purchase protection insurance or no foreign transaction fees.

Higher fees

While most credit cards have some sort of annual fee attached to them, unsecured credit cards typically have higher fees when you include the startup, monthly and annual fee you may have to pay when you get one of these cards.

Higher interest rates

In addition to the annual fee, an unsecured credit card may also have higher interest rates. This is why it's so important you pay off the balance each month before the interest charges start to snowball as a result of compounding.

Lower spending limits

It can be difficult to get a high credit limit on a secured credit card because the limit is based on your deposit amount. Also, secured cards aren't typically awarded credit limit increases over time. This all means you're limited in what you can spend on the card.

Rebuild your credit score

The biggest benefit of using a secured card is that you can rebuild your credit score by using the card properly. By paying the attached fees and purchases balance when they fall due, you're improving your credit score and increasing your borrowing power in the future.

Set your credit limit

Using this type of card also lets you set the credit limit that you have to work with each month. This is a draw for people who have had issues managing their spending in the past and don't want to deal with the temptation of a higher balance.

Transition to an unsecured card

Most lenders will transition you over to an unsecured credit card after a set amount of time has passed and you have kept up with payments and improved your credit score. You may need to speak with the lender to confirm this process, but getting a secured credit card is a great first step towards an unsecured one. If your income is low, there may be some limitation on what you can apply for.

Choose a card with a lower interest rate

You can save a lot of money on interest charges if you find a credit card with a lower interest rate. While in a lot of instances the interest rate on a secured card is more than on an unsecured credit card, you can locate competitive rates if you spend some time doing your research before choosing a credit card.

Make sure the lender updates your credit report

Not all credit card issuers report your payment history to the credit bureaus each month. This is a problem if you're trying to rebuild your credit and your payments are not being reported consistently. You need to contact the card issuer or read your contract to find out how often it reports to the credit bureaus.

Shop around to minimize credit card fees

Aside from the annual fee, you may also run into a monthly maintenance fee and a startup fee with your credit card. While you can't avoid all of these fees, you can avoid some of them by shopping around to find a card that works for your needs. Some have a smaller annual fee while others may not have a startup fee attached to them.

Start with a smaller credit limit

The deposit you put down on your credit card acts as collateral if you miss payments. The security deposit dictates what your credit limit will be on the card. If you've had issues managing payments on credit cards in the past, you might be better going with a smaller credit limit so you aren't tempted to overspend.

Can I access my security deposit?

No. You cannot use or withdraw from your security deposit while your secured credit card account is open. If you close the account, or transition to an unsecured credit card, your deposit will be released and returned to you.

Can you get turned down for a secured credit card?

While this type of card is suited for people with bad credit there are still credit requirements that need to be met to be approved. If you don't meet the minimum credit score requirements you could get turned down for the card until your score has improved.

Do secured credit cards really help your credit score?

Yes. Using a secured card properly is a great way to improve your credit history. By making balance payments on time you're gradually improving your credit score. However, the opposite is also true, so if you start missing payments or are late paying the balance, it can hurt your credit score. You need to treat secured cards in Canada like any other credit cards and pay the bill when it comes due. For example, if you pay a $500 deposit to get the secured card, your credit limit will reflect that deposit. A higher security deposit means a bigger credit limit while a smaller security deposit means less credit you have to work with. This amount is dependent on the lender.

What are the main benefits of a secured credit card?

The main benefits of using a secured Visa or Mastercard include the ability to increase your credit score, the option to set a lower credit limit, and the transition to an unsecured card if you manage your secured card responsibly.

What is a secured credit card actually secured against?

A secured credit car is secured against the deposit you put down when you open the account. For example, a card may offer a $200 starting limit in return for a security deposit as low as $49. Other cards may have limits ranging from $500 to $10,000 depending on your deposit.

Where can secured credit cards be used?

Secured cards can be used anywhere unsecured cards can be used. This includes shopping online and in stores.

Who can apply for a secured credit card?

As long as you're at least 18 years old you can apply for a secured credit card. If you have payment history from another country you can speak to the bank manager to see if they'll allow that information to be used for the application, but you may still need to apply for a secured card at first.

Why should I apply for a secured credit card?

If you have a low credit score it means you could get denied an unsecured credit card or be charged a higher interest rate. If you apply for a secured card you can build your credit back up and get approved for an unsecured card more easily in the future. Improving your credit score also means you can get approved for other types of loans, such as personal loans or car loans.

Will I earn interest on my security deposit?

It depends on the card issuer. In many cases no interest is payable, but you can check with your card issuer and request that your money be held in an interest-bearing account.