Credit cards offer users financial freedom, flexibility, and convenience in this era of electronic transactions. If you are in Canada, you must be considering applying for a credit card to enjoy all the perks of a credit card holder. Are you confused between secured and unsecured credit cards? And wondering which one suits you the best?
Well, in this article, I will walk you through all you need to know about these two types of credit cards in Canada so that you can choose the card that fits your needs in a better manner.
Secured Credit Cards
In Canada, secured credit cards are referred to as those credit cards that are backed by a deposit paid upfront. This deposit which is mainly paid in cash form acts as collateral.
The deposit amount is a kind of guarantee for the issuer to get the payment from that initial deposit if the credit card holder fails to make the payment. As the name suggests, these credit cards are ‘secured’ from default risk. If you are unable to pay back your credit limit at any time, then the bank will deduct or claim the funds you gave as the initial deposit. In this way, the issuer lowers the default risk by having collateral or guarantee.
You must be wondering how much security deposit you need to pay upfront to get a secured credit card. Well, it might come as a surprise, but usually, the credit limit of your credit card is equal to what you can pay in advance upfront. The more credit limit you need for yourself, the more initial deposit you need to submit to the bank. For example, if your initial deposit s of $5000, then your credit limit for a secured credit card will be $5000. Similarly, for more credit limits, say $10,000, you need to add more deposit ($10,000) to enjoy that credit limit.
You might be wondering why people still apply for secured credit cards when they have to pay upfront the amount equivalent to their credit limit. It is because they can improve or build their credit history by getting a secured credit card. In Canada, you need to maintain a good credit score for loans and unsecured credit cards. So, if you have a bad or no credit history to show, then you can apply for a secured credit card, use it for a while, build a strong credit profile, and get the required credit score to enjoy other forms of loan and credit cards and enjoy the related perks.
Unsecured Credit Cards
The credit card image that pops in your head while living in Canada is the one that is known as an unsecured credit card. As the name suggests, these credit cards do not require any security backup or collateral to get the credit card. So, if the credit card holder fails to live up to the financial commitment, then the bank doesn’t have any funds to reimburse their amount.
Unsecured credit cards are easily available for applicants who have a good and rather impressive credit history and credit score. With a good credit score, you can qualify for an unsecured credit card and all the associated benefits with it, such as low fees, high credit limits, and perks.
The confusion regarding secured credit cards and debit card
Many people get confused as to what is the fundamental difference between a debit card and a secured credit card when in both cards, you pay from what you already have given to the bank. Well, in a way, the functions of both these cards do sound similar, but they are way different than one another. The two major differences between these two are:
The financial payment history of the secured credit card is shared with two consumer reporting agencies in Canada (TransUnion and Equifax) to record and analyze the credit history of the cardholder. In contrast, the financial payment history of debit card holders is not shared with all these agencies.
The payment history for secured credit cards is used to formulate the credit score of the cardholder, which can help him/her build a positive score and become eligible for unsecured credit cards and other forms of lending.
Do secured and unsecured credit cards work differently?
Both secured and unsecured credit card works the same for credit card holders. They both offer a specified credit limit up to which the credit card holder can spend in the fixed time duration (a month). After a month, the credit card holder is supposed to pay the minimum due amount before the due date, or else he/she will be fined and has to pay interest on late payments.
There are surely differences in the application process, interest rate, fees, and perks, but the basic functioning of both cards is similar. If you see a credit card in anyone’s hand, then you won’t be able to tell by the look of it if it is secured or unsecured. They both work for the same purpose but have characteristics that make them different.
Differences between secured and unsecured credit card
As already mentioned, there are some prominent differences between secured and unsecured credit cards. Here are the basic aspects in which both cards differ.
Application process: The application process and duration for secured credit cards is much easier as compared to unsecured credit cards. It is because of the added screening and paperwork required for unsecured credit cards.
Screening process: Credit card issuers do not require any extensive screening to approve the application of secured credit cards. But for unsecured credit cards, the issuers need a thorough background check and credit history to ensure that the applicant checks all the boxes.
Interest Rate: The interest rate offered by Canadian banks to secured credit card holders generally higher because of the low credit score and the probability of default. In contrast, the interest rate for unsecured credit card holders is comparatively lower and more suitable.
Additional Perks: Banks in Canada offers different perks and bonuses to unsecured credit cards. These perks includes cashback, discounts, reward programs, bonuses, etc. Though a few banks provide perks with secured credit cards as well, they are pretty minimal and not at the level of what perks are offered with unsecured credit cards.
Credit Limit: The credit limit for unsecured credit cards is much higher. Whereas for secured credit cards, the credit limit is usually equal to the advance security deposit.
Measures to improve credit score
Getting a secured credit card gives you the opportunity of improving or building your credit score. To improve your credit score, you can follow these simple guidelines:
Always pay the outstanding balance in full or at least the minimum amount due before the due date. Never make a late payment after the due date, as it downgrades your credit payment history and credit score as well.
Try to keep your credit utilization low to under 30% to get a good credit score. It implies that you should spend up to 30% of your credit limit to utilize less available funds.
Do not unneseraily apply for new loans as with every new application, your overall credit score drops (5 to 10 points)
What credit score is required to get an unsecured credit card in Canada?
A credit score shows how well or poor your credit history is. Banks in Canada consider the credit score while screening applicants for credit card applications. The credit score can range from 300 to 900. A score of 650 or more is required by most banks to accept the credit card application. Some banks can even require a high score of 700.
Can immigrants apply for a credit card in Canada?
Yes, Canada is very welcoming to newcomers in the country. All kinds of immigrants (PR, International students, and Contractual expatriate workers) are considered for the award of credit cards in Canada so that they can easily manage their financial transactions while they are in Canada.
How many months are required to get an unsecured credit card from a secured credit card?
You can surely improve your credit score and move from a secured to an unsecured credit card. There is no specific timeline, and the policies of various banks in Canada differ on his aspect. In general, it takes 6 to 18 months to make a good credit history and credit score by paying all the due payments/credit ills on the prescribed time.
What happens to the security deposit if you pay all your payments on time while having a secured credit card?
The security deposit you pay upfront is refundable, which means that if you fulfill all your financial obligations while having a secured credit card, then you can refund or redeem the initial security deposit and get it back from the bank.