If you’re looking to build or rebuild your credit in Canada, a secured credit card may be an option worth considering. Unlike traditional credit cards, secured credit cards require a cash deposit as collateral, making them an accessible option for individuals with no credit history or those working to improve a damaged credit score. However, before applying for one, it’s essential to understand how they work, their benefits, and whether they are the right choice for your financial goals.
In this article, we’ll explore what a secured credit card is, how it works, and the pros and cons of getting one in Canada.
1. What is a Secured Credit Card?
A secured credit card is a type of credit card that requires you to make a security deposit with the card issuer. This deposit acts as collateral for the credit card’s limit, reducing the risk for the lender. For example, if you deposit $500, your credit limit will typically be $500. In the event you fail to make payments, the card issuer can use your deposit to cover the outstanding balance.
Secured credit cards operate similarly to regular credit cards in that they allow you to make purchases and repay the balance over time. However, they are designed for individuals who are either new to credit or looking to repair their credit score.
2. How Does a Secured Credit Card Work in Canada?
Secured credit cards are relatively straightforward to use. Here’s a breakdown of how they work in Canada:
1. Make a Deposit
To obtain a secured credit card, you’ll need to provide a security deposit to the card issuer. This deposit serves as collateral and is typically refundable if you close your account and pay off any outstanding balance. Your credit limit will generally match the amount of your deposit. For instance:
- If you deposit $300, your credit limit will be $300.
- If you deposit $1,000, your credit limit will be $1,000.
The deposit may be made through various methods, including by cheque, bank transfer, or credit card.
2. Make Purchases
Once your security deposit is made, you’ll receive your secured credit card, which can be used for everyday purchases, both online and in-person. Much like a regular credit card, you’ll need to pay your balance by the due date each month to avoid interest charges and late fees.
3. Make Payments
With a secured credit card, you’ll need to pay your balance in full or at least make the minimum payment by the due date. If you miss a payment, it can negatively impact your credit score, just like with any other credit card. Keep in mind that the issuer can draw from your security deposit if you fail to make payments, which can result in the loss of your deposit.
4. Build Your Credit
One of the primary benefits of a secured credit card is its ability to help you build or rebuild your credit. The card issuer will report your payment activity to the major credit bureaus (Equifax and TransUnion), allowing you to demonstrate your ability to manage credit responsibly.
If you make on-time payments and maintain a low credit utilization ratio (the amount of credit used compared to your available limit), you can gradually improve your credit score over time.
5. Upgrade to an Unsecured Credit Card
After using your secured card responsibly for some time (usually 6–12 months), many issuers offer the option to upgrade to an unsecured credit card. This means that your credit limit will be increased, and the security deposit will be refunded. This is the ultimate goal for many individuals who are trying to establish a solid credit history.
3. Pros of Getting a Secured Credit Card in Canada
1. Easy Approval for Individuals with No or Poor Credit
Secured credit cards are a great option for those with no credit history or individuals looking to rebuild their credit after missed payments, defaults, or bankruptcies. Because the credit limit is secured by your deposit, issuers are more likely to approve applicants who may otherwise be denied for a regular, unsecured credit card.
2. Build or Rebuild Your Credit Score
The primary advantage of a secured credit card is the ability to build or improve your credit score. If you make timely payments and maintain a low balance relative to your credit limit, you can demonstrate responsible credit behavior. Over time, this can have a positive impact on your credit score, which can make it easier to access more favorable financial products in the future.
3. Lower Risk for Lenders
Since the credit limit is secured by your deposit, there is less risk for the lender. This makes it easier for people with limited credit history or poor credit to qualify for a credit card. Additionally, many secured credit cards have lower fees and interest rates than unsecured credit cards aimed at individuals with poor credit.
4. Flexibility in Spending
A secured credit card works much like an unsecured credit card, allowing you to make purchases and build a credit history. You’ll also enjoy the benefits of online shopping, rewards programs (on some cards), and emergency use when you need it most.
5. Potential for Refundable Deposit
As long as you use the card responsibly, your security deposit will remain refundable. If you later upgrade to an unsecured card or close your account, the issuer will return your deposit, provided you’ve paid off your balance.
4. Cons of Getting a Secured Credit Card in Canada
1. Initial Deposit Required
The most significant drawback of a secured credit card is the initial deposit requirement. The amount of money you need to deposit is often equal to your credit limit, which can be a financial burden for some individuals. For example, if you need to provide a $500 deposit, this could limit your ability to use that money for other needs.
2. High-Interest Rates
Secured credit cards tend to come with higher interest rates than unsecured credit cards. If you carry a balance from month to month, the interest charges could add up quickly. To avoid paying high-interest fees, it’s best to pay your balance in full each month.
3. Fees and Costs
Many secured credit cards come with annual fees and other associated costs, such as application fees or maintenance fees. It’s essential to carefully review the terms and conditions of the card before committing to ensure that the benefits outweigh the costs.
4. Limited Rewards and Benefits
While some secured credit cards offer basic rewards (e.g., cashback or points for purchases), many lack the robust rewards programs that come with unsecured credit cards. If rewards are important to you, you may need to look for a specific secured card that offers them.
5. Temporary Credit Limit
Your credit limit is often tied to the amount of your deposit, which may limit your spending potential. If you want to increase your credit limit, you’ll typically need to deposit more money, which could limit your financial flexibility.
5. Who Should Consider a Secured Credit Card in Canada?
A secured credit card may be a good option if:
- You’re new to credit: If you have no credit history, a secured credit card can be a great starting point to establish a track record with credit bureaus.
- You’re rebuilding your credit: If you’ve had missed payments, defaults, or bankruptcy in the past, a secured credit card can help you rebuild your credit score over time.
- You want to control your spending: Because the credit limit is tied to your deposit, secured credit cards can be a useful way to manage your spending and avoid accumulating debt.
However, if you already have a strong credit history and access to unsecured credit cards, a secured card may not be necessary. You might want to consider other financial products that offer better benefits and rewards.
6. Conclusion
Secured credit cards can be an excellent tool for building or rebuilding your credit in Canada. They offer an opportunity to gain approval for a credit card even if you have limited or poor credit, and they allow you to establish a strong credit history with responsible use.
Before applying for a secured credit card, it’s important to weigh the pros and cons, including the deposit requirement and potential fees. If used responsibly, a secured credit card can be a valuable stepping stone toward achieving financial goals and improving your credit score. If you have any doubts, consider speaking with a financial advisor to determine whether a secured card is the right choice for your specific situation.
