What Is a Secured Credit Card? How It Works and Why It Matters

When you’re looking at how to build credit quickly in Canada, either as a newcomer or someone recovering from a large debt load, it isn’t always easy. Especially if you want to get approval on an unsecured credit card application. But you’re not out of luck. 

If you find yourself struggling to get a traditional credit card, consider using a secured credit card instead. Secured credit cards aren’t as common, but they’re a valuable tool when used correctly. Ultimately, they can help you prove to lenders that you can manage credit wisely.

In this guide, we’ll break down what secured credit cards are, how they work in Canada, and how you can use one to help improve your credit score.

Secured Credit Cards in Canada

A secured credit card is a type of credit card that requires a deposit upfront. The deposit then acts as collateral for the lender, reducing their risk. Having this deposit is what allows you to qualify for the card even if you have little to no credit history. Essentially, this is the main difference between secured vs unsecured credit cards.

With a secured credit card, the amount you’ll need to pay depends on several factors, ranging from your personal credit history to your issuer’s policy. Your desired credit limit will also play a role in the deposit amount. 

Just remember, the deposit doesn’t pay your balance. Instead, it acts as a security guarantee for the lender, which means you will still need to pay your monthly bill as you would with a traditional credit card.

How Secured Credit Cards Work in Canada

If you are looking to use a secured card to build credit in Canada, you need to first understand how they work. The process begins with an application and requires an upfront deposit. As mentioned above, this deposit guarantees that you will pay your balance. Often, issuers use this amount as your credit limit. If, for example, you decide to make a deposit of $250 on a new (secured) card, your credit limit for that same card would likely be $250. Exact rules vary by issuer though.

After you get approval on your application, you will activate your new credit card and can use it for everyday spending. It works similar to an unsecured credit card when you charge purchases to it. For example, you will still need to make monthly payments (ideally for more than the minimum amount!) and your issuer will report these payments and your credit utilization to the credit bureaus in Canada, either Equifax or TransUnion. These companies are responsible for keeping your credit history on file and calculating your credit score. When you use your card responsibly, you can help to boost your credit health.

Who Benefits Most From a Secured Credit Card?

There are several groups of Canadians who can benefit from a secured credit card. If you’re new to the country or have no existing credit history, then this is an easy way to start. Every on-time payment you make will help to establish your financial reputation.

A secured credit card may also be a wise choice for students and young adults if they don't get approved for one of the best student credit cards.

Finally, secured credit cards are a great option for anyone who has faced financial challenges (think bankruptcy, missed payments or high debt levels). In these cases, a secured card can help to put you back on the right track. It allows you to demonstrate consistent repayment behavior and, over time, you can rebuild your creditworthiness.

If, however, you already have a high credit score and a stable financial record, then an unsecured rewards credit card may be a better fit. These options tend to offer higher limits and you can also benefit from additional perks with a cash back credit card or travel rewards card.

Read More: Best Cashback Credit Cards in Canada, Best Travel Credit Cards in Canada, Best Rewards Credit Cards in Canada

Pros and Cons of Secured Credit Cards

Like any financial product, the benefits of even the best secured credit cards in Canada come with tradeoffs. Before applying for this type of card, be sure you understand all the details buried in the fine print so you can decide if it’s the best credit card for your needs.

Pros of secured credit cards:

• Easier to obtain approval compared to a traditional, unsecured card
• Can help build or rebuild your credit
• Works like a regular card for payments and online purchases
• Your deposit is refundable

Cons of secured credit cards:

• Requirement for an upfront deposit can be a challenge if you’re on a tight budget
•  May include credit card annual fees and/or high interest rates
•  Often offers lower credit limits

While secured cards aren’t perfect, they are an effective way to prove your creditworthiness over time.

How to Transition to an Unsecured Credit Card

Once you’ve had your secured credit card for a while, you may be ready to upgrade to an unsecured credit card. Luckily, if you’ve demonstrated responsible habits, like paying your bill on time (and in full), you are likely to qualify for many contenders, depending on your credit score, income, and general financial profile. 

Before applying for a new credit card, be sure to keep a low credit utilization ratio (typically below 30%) and avoid making late payments. Likewise, ensure your card’s account is in good standing.

When your account converts to an unsecured one, your issuer will refund your original deposit. This usually happens through a direct transfer or cheque, though it is best to contact the issuer for their exact policy.

Takeaway

A secured credit card may not be as glamorous as a flashy travel rewards card, but it serves an important purpose: it helps you to build trust with lenders. By putting down a refundable deposit and managing your balance responsibly, you can create a positive payment history and strengthen your credit score in the long run.

Whether you’re starting from scratch or working to rebuild your credit, a secured credit card can act as a stepping stone.