Secured Credit Cards: Pros, Cons, How They Work, and More

If you’re having trouble applying for an unsecured credit card, you may consider applying for a secured one instead.

These are often easier to apply for, even with a poor credit score.

In this guide, we look into what secured credit cards are, the pros and cons, how they can help you build credit, and more.

What is a Secured Credit Card?

A secured credit card is a type of credit card that requires you to make a security deposit before you can use it.

You deposit a sum of money, and your credit limit equals your deposit amount.

Because of the need for a security deposit, issuers tend to have more lenient application requirements. Secured credit cards are, therefore, often popular with people who have poor credit scores and have difficulty qualifying for other types of credit.

How Does a Secured Credit Card Work?

With a secured credit card, you must put down a security deposit before using it.

For example, you may put down $1,000. Your credit limit equals this amount, so you can borrow up to $1,000 on your credit card.

You are not spending your money, so it is not like a cash or debit card. Instead, you are borrowing the money just like with a standard credit card, but the security deposit reduces the risk for the bank issuing the card.

This means they can be less strict about who can apply for a secured credit card. If you have a poor credit score, you may still be able to apply for one of these cards, even when you cannot qualify for a standard unsecured credit card.

However, there may be other requirements regarding your income, credit history, and more.

Are Secured Credit Cards Good for Building Credit?

Building your credit score is one of the most popular reasons for getting a secured credit card. While other forms of credit may be inaccessible to you, secured credit cards are relatively easy to apply for.

You simply make your security deposit and start using the card. Then, when you make your monthly repayment on time, this is reported to the credit bureaus.

If you make your payments on time, you will build your credit and improve your score.

Over time, your score may increase to the point where you can apply for an unsecured credit card.

Advantages of a Secured Credit Card

There are several advantages to consider when it comes to secured credit cards:

It Can Help Rebuild Credit

A secured credit card can be one of the easiest ways to rebuild your credit record. It can be a good alternative if you cannot apply for other forms of credit because you have a low credit score.

Many secured credit cards are free to use with no annual fee, making them an affordable option for improving your credit score if you pay off your balance each month in full.

It Is Easier to Qualify For

While qualifying for an unsecured credit card may be difficult, secured credit cards have more lenient requirements.

To apply for an unsecured credit card, you will often need a credit score of 660 or over. But you can often apply for a secured credit card despite a poor credit score.

You May Upgrade to an Unsecured Card After a While

Once you start using your secured credit card and making payments on time every month, your credit score should improve. When this happens, you may be able to apply for an unsecured credit card.

Some companies will allow you to upgrade to the unsecured card once you have been using the secured card for a while.

Cons of a Secured Credit Card

There are also a few disadvantages that you should be aware of before you start using an unsecured credit card:

It Requires an Upfront Deposit

First of all, you will need to make a deposit using your funds. While this may not be a problem if you already have the money, you may not have money available to make a deposit.

This can hamper your ability to apply for a secured card successfully.

It Has a Low Credit Limit

The credit limit of an unsecured card is linked to the amount of money you provide as your security deposit.

If you only deposit $500, this is the credit limit, and a maximum amount will often be applied too.

Compared to many unsecured credit cards, this limit is quite low and may not meet your monthly borrowing needs.

Interest Rates May Be Higher

Many people using unsecured credit cards have low credit scores. As such, the interest rates on these cards are often higher.

This is not a problem if you pay off your balance in full each month. But if you carry a balance on your unsecured card, the interest payments can quickly add up.

How to Choose the Best Secured Credit Card

Here are some of the key factors to consider when choosing the right secured credit card:

• The annual fee, if there is one.
• The interest rates, both for purchases and cash advances.
• The requirements in terms of your credit score and income.
• The minimum and maximum credit limit.
• The rewards provided for using it, like cashback

Best Secured Credit Card in Canada

We think the Neo Secured Credit Card is the best secured card to build credit in Canada.

It has guaranteed approval, no annual fees, and no over-limit fees, and you can increase your credit limit whenever you want and use the app to track your expenses.

You can also earn unlimited cashback at a rate of 5% on average and a minimum of 0.5%.

Are Secured Credit Cards Worth It?

Secured credit cards can be a great option for many people for different reasons.

You might have a bad credit score and want to use a credit card that allows you to build your score over time.

If you cannot qualify for an unsecured credit card, you may still be able to get access to credit with a secured card.

Just make sure you compare the options available and choose the secured card that best meets your needs.

FAQs

Related: What is the Average Credit Score in Canada?