How do secured credit cards work?
Secured credit cards require you to post a security deposit equal to the card's credit limit. For example, on a regular secured card, a $750 deposit would give you a credit limit of up to $750. Your security deposit protects the credit card provider from a potential default and lets them issue cards to customers who usually pose too great a credit risk to be approved for a card.
The good news: once you post your security deposit, you get access to a genuine revolving credit line — one that works exactly like any other credit card. Plus, if you demonstrate good payment habits over time, your credit card issuer may even extend additional credit to you without asking for more collateral.
But, of course, the best part about a secured card is that your credit activity will be reported to the various credit bureaus in Canada. That means on-time payments and responsible spending can quickly translate into a higher credit score.
Who should get a secured credit card?
Canadians with poor credit or no credit are ideal candidates for secured credit cards. If you need to build (or rebuild) your credit history, apply for a secured card. It's also a good fit if you don't qualify for a regular card due to a debt default or personal bankruptcy.
Secured cards are also a great tool for new Canadians — people who have no established credit history and no credit score. You can rapidly build up your credit with a secured credit card and then, one day, qualify for a regular credit card, line of credit, or mortgage.
What's the best way to build my credit score with a secured credit card?
Building credit with a secured credit card is easy: make small purchases several times per week and pay your card off in full at the end of the month. Using your card and paying it off regularly shows credit agencies that you can manage an active credit card account responsibly.
You should also keep your secured card's balance reasonably low, so your credit utilization ratio (the total amount of available credit you use on a monthly basis) stays down. If your ratio's too high, you'll be assessed as a greater credit risk. Credit agencies will see that you're spending all or most of your available credit every month. As a result, it'll be harder for you to improve your credit score.
But when in doubt, follow this simple trick: pay off your secured card several times throughout the month, so your balance never gets too high.
How much do I have to deposit on a secured credit card?
There's no standard minimum amount. Most secured cards require a $500 deposit to get started.
Are there any disadvantages to using a secured credit card?
Some secured cards charge higher fees and interest rates than comparable unsecured cards. As with any type of credit card, some are good, some are bad, and some are terrible. That's why you need to compare cards before you apply.
How's a secured credit card different from a prepaid card?
The difference — and it's huge — is that secured cards give you a genuine revolving line of credit, not just the ability to spend money you already deposited on the card. Just like with a regular credit card, secured cards let you carry a balance (and be charged interest), make minimum monthly payments, and add new charges to your account.
And because secured cards have real credit lines, their activity is reported to credit bureaus in Canada, which can help boost your credit score over time — if you pay your balance every month. Prepaid cards, in contrast, won't help your credit score: you're just spending money you already put on the card.
If I'm posting a security deposit, why do I have to pay interest?
Your deposit is separate from the credit line attached to your secured credit card. When you make a purchase, you're spending money on credit, not money from your security deposit. That's why credit card providers can charge interest on your balance.
What happens to my security deposit?
Your deposit is held in a collateral account. Some credit card providers pay a small amount of interest on the security deposit, which is usually credited to your account at the end of the month.
What should I look out for in a secured card?
Make sure the credit card provider reports to at least one credit bureau. If the activity on your card isn't being reported, you won't be able to build your credit score, which is one of main reasons for taking a secured credit card. You should also read the fine print to make sure there aren't any hidden fees or surcharges. Some secured cards charge a fee just for applying.
You also need to consider the tradeoff between interest rates and annual fees. Cards with annual fees usually have lower interest rates, but this feature's only beneficial if you carry a monthly balance. Sometimes it's better to choose a card without an annual fee, even if it charges a higher interest rate. This is especially true for cardholders who diligently pay off their balances every month.
Lastly, make sure your secured card provides a credit line equal to your collateral deposit. If you post a $750 deposit, you should get at least $750 in credit. Be very wary of any card that provides less credit than your deposit.
Compare secured credit cards today
Using a credit card responsibly is one of the quickest ways to establish, improve, and rebuild your credit. For many Canadians, secured cards are a great way to earn higher credit scores and achieve a more secure life.
Apply for your secured credit card today at LowestRates.ca.
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