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What is a secured credit card (and how do they work?)

Odds are, when choosing a credit card, you’ll want to go for an unsecured card. Almost all rewards credit cards (like cash back or points cards) are unsecured credit cards that come with predetermined credit limits and require good credit scores of at least 650.

But what happens if you made some mistakes in the past that affected your credit history in a negative way? Or, if you don’t have a credit rating at all? You can be deemed too risky and get rejected. It’s more common than it sounds, especially for newcomers to Canada or anyone who’s dealt with bankruptcy or a consumer proposal.

That can be a drawback, because aside from offering rewards, credit cards can play a big role in building your credit score. And that can go on to impact your odds of getting a mortgage or loan in the future.

The good news is that you can still be approved for a credit card and rebuild your credit score even if you have bad credit by using what’s known as a secured credit card.

What is a secured credit card

A secured credit card functions like any other credit card but requires a security deposit. You pay a deposit to the card issuer (i.e. a bank), usually one or two times the amount of your desired credit limit, and the issuer holds this deposit as collateral and extends you a credit card in return.

Since they’re backed by a deposit (hence their name), secured credit cards are far less risky for banks and are very easy to get. If you apply for a secured credit card, you’re almost guaranteed to be approved.

The great thing about secured credit cards is they’re one of the easiest and most accessible ways to build or rebuild your credit. Since secured credit cards report to credit bureaus, by using one responsibly and making your payments on time on a regular basis, your credit score will slowly rise.

It’s important to note that the card’s security deposit can’t be used to pay off your balance. It’s there to show the credit card provider that you’re serious about rebuilding your credit. In other words, they hold the funds to ensure you’re paying your bills. You do get these funds back if you close your account in good standing.

Who are secured credit cards for?

A secured credit card can be the right fit for anyone who has bad credit, no local credit history, or can’t get approved for an unsecured credit card or line of credit because of recent financial problems like bankruptcy.

By using a secured card responsibly, you can gradually improve your score, and over time, prove to creditors and lenders you can be trusted to make payments on time, manage an unsecured credit card, take out loans, and borrow money.

Do secured credit cards help your credit?

As covered above, yes they do. In fact, it’s arguably their biggest selling point.

Activities on secured credit cards are reported to credit bureaus like Equifax and Transunion. So, if you’re using a secured credit card and paying your statements on time every month, there will be a positive impact on your payment history. Payment history is the single largest factor that goes into calculating your credit score and is a measure of how diligently you make your minimum payments on time. Even missing just one or two payments can cause a significant drop to your credit score.

A secured credit card can also help you either lengthen or establish your credit history, which can be especially important if you’re new to Canada, have no proven history of managing credit in the country, and can’t be approved for any other accounts.

A secured credit card won’t lead your credit score to jump to good standing after one billing cycle, but the idea is to keep paying your bills on time (and preferably in full) until your credit score is considered good. A good credit score starts at 650 (the scale is from 300-900), so you should strive for as high of a number as possible.

Overview: the differences between secured vs unsecured credit cards

  • Your credit rating: Both secured and unsecured credit cards show up on your credit file, affect your credit rating, and can improve your credit score.
  • Deposit requirement: Secured credit cards require a security deposit whereas unsecured credit cards do not.
  • Ease to be approved: Since they’re backed by deposits, many secured credit cards have virtually guaranteed approvals with little to no requirements. On the other hand, unsecured credit cards don’t have any collateral and pose a greater risk to the issuer, which is why they come with a few approval requirements such as a fair or good credit score (usually at least 650, though it can be higher depending on the card), no recent history of bankruptcy (typically within the last seven years), and sometimes minimum income requirements.
  • Annual fee: Both secured and unsecured cards may or may not come with an annual fee. The annual fee you’ll pay depends on the card that you’re applying for.
  • Rewards: Travel credit cards or cash back credit cards, which are both unsecured credit cards, offer rewards on every dollar you spend. With secured credit cards, you won’t get any rewards.
  • Credit limits: Limits on secured cards will vary based on the size of the deposit you put forward – which means you can effectively set your own limit – and usually have strict upper and lower amounts (i.e. a minimum of $200 up to a maximum of $10,000). Unsecured card limits aren’t tied to a deposit and can be much higher than what secured cards offer. You can’t set your own credit limit on an unsecured card and the limit will be determined by the card issuer based on your creditworthiness – though you can request for credit limit increases.
  • Set-up fee: Some secured cards may require you to pay a small upfront set-up fee in order to receive the card, separate from your deposit. No unsecured cards have set-up fees.
  • Additional benefits: Many premium unsecured credit cards come with additional benefits such as travel insurance, lounge access, extended warranty, and more. With most secured credit cards, however, you don’t get any additional benefits but that’s okay since that’s not the purpose of the card.
  • Interest rates: With either card type, you’ll owe interest on any balance you carry from month-to-month while you’ll owe no interest if you pay off your balance in full. The standard annual interest rate is 19.99% but it can vary depending on the card you carry.

Secured credit cards vs prepaid credit cards

You may have heard prepaid cards can be an effective way to help keep your spending in check, but they’re starkly different from secured and unsecured credit cards in a few major ways. Namely, prepaid cards don’t help you build or rebuild your credit in any way.

Prepaid cards don’t have credit limits, and instead, you’ll load your own cash on to the prepaid card which you can then spend. Since you won’t be extended a line of credit and will be using your own money, a prepaid card will have no effect on your credit rating and is less like a credit card and more like a debit card – though, prepaid cards aren’t linked to a specific chequing account.

With a secured card, you’ll have access to a revolving line of credit and can improve your credit score when you make payments on time by proving you can be trusted with managing borrowed money.

Secured credit cardPrepaid card
Can help you build/rebuild your credit scoreYesNo
Offers a revolving line of creditYesNo, you’ll load your own money onto a prepaid card
Can charge interestYes, but only if you carry a balanceNo, you’re using your own money

Applying for a secured credit card

When you apply for a secured credit card, you’ll need enough cash on hand to pay the deposit, which is usually one to two times the amount of the credit limit. You’ll likely also have to go through a credit check when applying, but don’t fret, you’re virtually guaranteed to be approved for a secured card. If you’re a newcomer to Canada, though, you’ll want to first check if the card issuer allows for applications from those without residency status.

In the case of some secured credit cards, you may also have to pay a set-up fee (that’s separate from the deposit). This may either be a flat fee or a percentage of your credit limit. For example, if you apply for a secured credit card with a credit limit of $2,000 and the set-up fee is 3%, you’ll have to pay $60.

Using a secured credit card

Once you’ve been approved for your secured credit card and paid your deposit, you can start using your secured credit card to build or rebuild your credit rating. You can use a secured card exactly as you would an unsecured card.

Additionally, just like any credit card, if you don’t pay off your balance on your secured card in full each month, you will have to pay interest on your carried-over balance. You also can’t use your security deposit to pay off your balance as it’s held by the card issuer as collateral.

Tips for using a secured credit card

  • It’s absolutely critical that you make at least your minimum payments on time every month by the due date shown on your secured card’s statement. A secured credit card isn’t a guaranteed way to improve your credit score, and will only help you if you use it responsibly. Missing payments can further tank your credit score and lead to hefty interest charges and additional late fees.
  • Keep track of your monthly billing cycle and payment due dates by setting up calendar reminders on your smartphone or email alerts from the card issuer.
  • To avoid owing any interest, ensure you don’t just make your minimum payments but pay off your entire balance owing in full. Paying off your balance in full can also indirectly help improve your credit score and can signal to creditors you aren’t overleveraged and can manage to pay off your balance regularly.
  • Your secured card shouldn’t be stored away in a drawer never to be used. Instead, try using your secured card sparingly at least once every month or two to cover smaller purchases you can afford to pay off in full at the end of your monthly billing cycle. You’ll want to establish a payment history and prove you can make payments on time, and that can’t be done if your secured card isn’t active. Remember though, avoid making large purchases or overspending on your secured credit card.

Which secured credit card should you choose?

Compared to unsecured credit cards (from which there are several dozens choose from), the secured credit card market is far more limited. That said, there are still some great secured cards to choose from, and we’ve highlighted two of our favourites below.

Refresh Financial Card

Card details

  • Annual fee: $48.95
  • 17.99% interest rate on purchases
  • Credit limit is set by the amount of security deposit put down, between $200-$10,000

If you’re ready to get a hold of your credit, we’d recommend taking a look at the Refresh Secured Card, which is arguably the best credit card for people with bad credit.

What really makes this card appealing is that you won’t have to undergo a credit check when applying. You can also get the credit card with a deposit of as little as $200.

Plus, as a Refresh cardholder, you’ll get access to Refresh f.i.t (Free Financial Training), a series of online courses that will teach you about money management.

The card does have an annual fee of $12.95 along with an additional monthly maintenance fee of $3, which adds up to a total of $48.95 every twelve months. Its annual interest rate is set at 17.99%, which is a notch lower than the standard 19.99% charged by most secured and unsecured cards but will still result in some hefty interest charges if you do carry a balance. If you anticipate you’ll be carrying a balance, consider the next card on this list.

Home Trust Secured Annual Fee Visa

Card details

  • Annual fee: $59
  • Low 14.9% interest rate on purchases
  • Credit limit is set by the amount of security deposit put down, between $500-$10,000

If having the lowest interest rate possible matters the most to you, then consider the Home Trust Secured Annual Fee Visa Card, which has a lower purchase interest rate of 14.90%.

If you don’t quite manage to pay off your balance in full, that lower interest rate can help you rack up fewer interest charges (though it’s recommended that you do manage your spending and only use secured cards sparingly for purchases you can afford to pay off in full).

The card does have an annual fee of $59, though you do have the option to pay the fee all at once or on a monthly basis in instalments of $5. Lastly, it’s worth noting that if you don’t use the Home Trust Secured Card at least once in a 12 month period, you’ll owe a $12 inactivity fee. While this is a slight drawback, you’ll want to get in the habit of using your secured card at least occasionally once a month or so to show signs of card activity and to help establish a track record of positive payments.

Home Trust Secured No Fee Visa

Card details

  • Annual fee: $0
  • 19.99% interest rate on purchases
  • Credit limit is set by the amount of security deposit put down, between $500-$10,000
  • Not available to residents of Quebec

The Home Trust Secured Visa‘s biggest appeal is that it doesn’t have an annual fee. The card does have a standard annual interest rate of 19.99%, but as long as you pay off your balance in full every month, you won’t owe any interest. Like with other Home Trust credit cards, there’s a $12 inactivity fee if you don’t use the card at least every 12 months, but considering this fee can easily be avoided by making at least purchase and that you’ll want to use the card at least somewhat regularly to establish a positive payment history, it’s not that big of an issue.

Life after a secured credit card

A secured credit card is a stepping stone for Canadians with no credit rating or a bad credit rating. If you’ve been approved for a secured credit card, now is your chance to prove to your lender that you’re capable of using credit responsibly. You should pay off your credit card every month, if possible, and if you can’t, you should keep the balance to less than 35% of your credit limit.

If you do this, eventually you’ll qualify for an unsecured credit card. You’ll get your deposit back (plus interest), and you’ll enjoy the benefits of an unsecured credit card, including signup bonuses and rewards points. It usually takes between 12 and 18 months to qualify for an unsecured credit card. How soon you qualify will depend on your credit rating, your repayment history and how comfortable your lender is with your personal finances.

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