A secured credit card can help individuals with limited or poor credit history to rebuild their credit scores. However, many Canadians are unsure of how secured cards differ from regular and prepaid credit cards. This article covers the basics of secured credit cards and explains when you might need one.
What Is a Secured Credit Card?
Secured credit cards work much like regular ones, but with one key difference: they require a refundable security deposit. This deposit acts as collateral, making it less risky for the lender to issue the card to someone with a low credit score or no credit history.
When you apply for a secured credit card, you’ll need to provide a security deposit, which is usually equal to the credit limit on the card. For example, if you apply for a $500 credit card limit, you’ll need to provide a security deposit of $500 upfront.
This security deposit is held in a secure account, like a savings account or GIC product. You won’t have access to those funds while you have the secured credit card in place. Over time, as your credit score improves, the credit card issuer may be willing to release the security back to you and switch your credit card account to a regular unsecured card.
How Secured Credit Cards Help You Build Credit
Once your secured credit card has been activated, it works just like a regular credit card. You can make purchases and pay bills in person and online with your card. The main difference is that your own money, in the form of a security deposit, is backing your credit limit.
One of the primary benefits of secured cards is that they can help you build a positive credit history. Most secured credit cards report your payments to the major credit bureaus, TransUnion and Equifax, allowing you to establish a track record of responsible credit use.
By making timely payments and keeping your balance low, you demonstrate to lenders that you’re a reliable borrower.
As you build your credit by using secured credit cards responsibly, you may eventually qualify for unsecured credit cards with better rewards and lower interest rates. So, while secured credit cards may not offer the same perks as their unsecured counterparts, they’re a critical tool for building or rebuilding credit, paving the way for a more stable financial future.
Secured vs. Prepaid Credit Cards
Prepaid credit cards are more like debit cards. You load funds onto the card and use it to make purchases until the funds run out. Unlike secured credit cards, prepaid cards don’t require a deposit that the issuer holds. Instead, the funds you load onto the card are used directly for transactions. Prepaid cards typically don’t report to credit bureaus, so they won’t help you build your credit. They might also have fees for usage or loading the card with funds.
Secured vs. Unsecured Credit Cards
Unsecured credit cards do not require a security deposit. They tend to offer higher credit limits and are more common than secured cards, but they are harder to obtain if you have a poor credit rating or no established credit history. Both secured and unsecured credit cards report your payment history to credit reporting agencies, allowing you to build or improve your credit score.
Secured Credit Card Examples in Canada
Most banks offer a secured credit card product, as do other credit card issuers. Here are some examples of secured credit cards in Canada.
Neo Financial Secured Mastercard
The NEO Financial Secured Mastercard is a guaranteed approval, no annual fee secured credit card designed for people who want the convenience of a credit card but are struggling to qualify for a regular. unsecured Visa or Mastercard.
You can get this card with a credit limit as low as $50 (and up to $10,000), and Neo doesn’t pull a hard credit check when you apply, which is a nice bonus. Speaking of bonuses, this card offers cash back of up to 5% when you use the card at one of Neo’s many retail partners.
Home Trust Secured Visa
The Home Trust Secured Visa is one of Canada’s highest-rated secured credit cards. You can choose between no annual fee and a 19.99% purchase interest rate or an annual fee of $59 and a lower interest rate of 14.90%. If you plan to pay off your credit card balance in full each month, then the no-annual fee option is the best choice. Unlike the Neo Financial Secured Mastercard, the Home Trust’s minimum credit limit is $500.
Capital One Secured Mastercard
The Capital One Secured Mastercard is another solid option. There is a $59 annual fee and a high purchase interest rate of 21.9%, but approval is guaranteed and you can put as little as $75 down as a security deposit. One potential drawback – the highest possible credit limit is only $300.
One nice thing about the Capital One card is the complimentary insurance coverage that comes with the card, including Purchase Assurance, Extended Warranty, Car Rental Collision/Loss Damage Waiver Insurance, Price Protection Insurance, Common Carrier Travel Accident Insurance, Baggage Delay, and Travel Assistance.
FAQs
When do you get your deposit back on a secured credit card?
When you close the account or transition to an unsecured credit card, you’ll typically get your deposit back on a secured credit card. The issuer will usually refund your deposit as long as you don’t have any outstanding balances or pending fees. Remember to pay your balance on time each month to maintain a good credit history and increase your chances of upgrading to an unsecured card.
Do secured credit cards offer rewards?
Yes, some secured credit cards offer rewards. For example, the Neo Secured Mastercard provides cash back rewards, with up to 5% cash back on purchases made with participating Neo partners and 0.50% on everything else (up to a $5,000 limit per month).
Are secured credit cards available in Canada?
Yes, secured credit cards are available in Canada. There are multiple options, including the Neo Secured Mastercard, as well as cards from Home Trust and Capital One, and many more.
What Is a Secured Credit Card?
