What is a Secured Credit Card (and How Do They Work?)

Jordann Brown
by Jordann Brown June 28, 2019 / No Comments

Odds are, when choosing a credit card, you’ll want to go for an unsecured card. Almost all rewards credit cards (be it a cash back or points card) 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 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 card, you’re almost guaranteed to be approved – even if you have bad credit or filed a consumer proposal.

One of the great things about secured credit cards is they can help build your credit. Since secured credit cards report to credit bureaus, after 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 sort of like collateral to ensure you’re paying your bills. You do get these funds back if you close your account in good standing.

Do secured credit cards help your credit?

Simply put, yes.

As mentioned earlier, secured credit cards report to the credit bureaus. So, if you’re paying your bills on time every month, there will be a positive impact on your credit score. It won’t 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 and unsecured credit cards

  • Deposit requirement: Secured credit cards require a security deposit whereas unsecured credit cards do not.
  • 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.
  • Ease to be approved: Some secured credit cards have virtually guaranteed approvals with little to no requirements, but unsecured credit cards typically have a few different approval requirements such as a minimum income and a good credit score.
  • Rewards: Travel credit cards or cash back credit cards which are both unsecured credit cards offer some great rewards. Some of these credit cards also come with generous sign up bonuses which offer a lot of value. With secured credit cards, you won’t get any rewards.
  • Additional benefits: Many of the higher-tier 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.

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. Depending on the card, you’ll need to provide a deposit of at least $200 to $500. You’ll also likely 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 check if the card issuer allows for applications from those without permanent residency status.

In the case of some secured credit cards, you may also have to pay a setup fee that’s separate from the deposit. This fee is usually 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 setup 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 – including making purchases online or over the phone. That said, there may be some limitations (i.e. some car rental agencies may not accept secured credit cards).

Additionally, just like any credit card, if you don’t pay off your balance on your secured card in full each month, you’ll 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. Remember, a secured credit card isn’t like a prepaid card as you’re being given access to a line of credit as opposed to using your own money.

Which secured credit card should you choose?

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

Refresh Financial Card

If you’re ready to get a hold of your credit, we’d recommend taking a look at the Refresh Financial 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. Plus, as a Refresh cardholder, you’ll get access to free financial education courses.

Refresh Financial wants you to make smarter money decisions so cardholders get access to Refresh f.i.t – Free Financial Training, a series of online courses that will teach you about money management.

Refresh Secured Visa

  • Annual fee: $48
  • 17.99% interest rate on purchases
  • Credit limit is set by the amount of security deposit put down, between $200-$10,000

Home Trust Secured Annual Fee Visa

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 purchase interest rate of 14.90%. That being said, the annual fee is slightly higher at $59, so you’ll want to factor that in your decision as well.

Home Trust Secured Annual Fee Visa Card

  • Annual fee: $59
  • Low 14.9% interest rate on purchases
  • Credit limit is set by the amount of security deposit put down, between $500-$1,000

Life after a secured credit card

A secured credit card is a stepping stone for Canadians with no credit 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 in full, 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 sign-up 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.