When most people shop around for a credit card, they typically consider travel rewards or cash back cards. However, if you have a low/no credit score, getting approved for one of these cards can be difficult.
Fortunately, there’s another option available — secured credit cards. While a secured credit card may not give you a ton of perks, it comes with nearly guaranteed approval, and it can help you improve your credit score.
What is a secured credit card?
A secured credit card is a regular credit card that requires a security deposit. That security deposit typically acts as your credit limit. As you make purchases, your credit history will be reported to one or both of the credit bureaus in Canada: Equifax and TransUnion.
What makes secured credit cards interesting is that you’re almost guaranteed approval. That’s because your security deposit acts as collateral. This is the opposite of traditional credit cards that are unsecured; with those types of credit cards, you’re assigned a credit limit. No deposit is required.
With a secured card, you’re unlikely to earn any points, cash back, or get any additional benefits, but that’s not what they’re meant for. Secured credit cards are designed to help people with no credit history or who have gone through bankruptcy or a consumer proposal rebuild their credit.
How secured credit cards work
Functionally speaking, secured credit cards are no different from unsecured credit cards. Once your security deposit is loaded, you can use your secured credit card to make purchases online and in-stores.
The main difference between secured credit cards and unsecured cards is the security deposit. With a secured credit card, your security deposit acts as your credit limit. For example, if you deposit $500, your credit limit would be $500.
Although your security deposit can’t be used to pay off your balance, you would get it back if you ever close your account in good standing. The deposit is required because it gives the credit card provider a level of protection in case you don’t make your payments.
Secured credit cards use either the Visa or Mastercard networks. You would know which one the card uses before you apply. There are no secured credit cards that use the American Express network.
What is an unsecured credit card?
Unsecured credit cards are what most people are used to. You apply for the card, and if approved, you’re assigned a credit limit. No security deposit is required.
What makes unsecured credit cards appealing is that many of them come with rewards. You can earn cash back, travel rewards, or store rewards. In addition, you can get benefits such as travel insurance, roadside assistance, lounge access, mobile device insurance, extended warranty and more.
While all of these perks are clearly appealing, unsecured credit cards do charge you interest if you don’t make your payments in full each month. The interest rate of unsecured credit cards typically ranges from 20% to 24%. To be clear, if you’re not paying your bills in full each month, the rewards aren’t worth it since you’ll be paying interest charges.
Unsecured vs. secured credit cards
When deciding between an unsecured and secured credit card, it’s best to look at the differences.
Credit hit when applying: When applying for an unsecured credit card, a hard inquiry is done on your credit profile, which results in your credit score dropping a few points. This doesn’t happen with secured credit cards.
Income requirement: Some unsecured credit cards have a minimum personal or household income requirement to be approved, whereas unsecured credit cards don’t.
Minimum credit score: You’re almost guaranteed to be approved for a secured credit card regardless of your credit score. Unsecured credit cards may have a minimum credit score requirement.
Annual fee: Both secured and unsecured credit cards may come with an annual fee. How high the fee is will depend on the type of card you’re getting.
Security deposit: Secured credit cards require a security deposit, whereas unsecured cards don’t.
Credit limit: You’re assigned a credit limit when approved for an unsecured credit card. When it comes to secured cards, your limit is typically based on your security deposit.
Earn rate and rewards: Unsecured credit cards can come with generous earn rates and benefits. With secured credit cards, it’s unlikely you’ll get any perks.
Interest rate: Both secured and unsecured credit cards have a purchase interest rate around 20%. That said, some unsecured credit cards have a lower interest rate.
Credit building: Your payment history and credit used gets reported to the credit bureaus. This can have a positive or negative impact on your credit score.
Secured credit cards vs. prepaid credit cards
Some people falsely believe that secured credit cards are the same as prepaid credit cards. That’s not the case, as they’re two different products. The main difference is that secured credit cards can help you build your credit, whereas prepaid cards don’t.
With both cards, you do need to deposit funds to use your card, but the deposits act in different ways. With prepaid cards, the funds you load onto your card can be used to make purchases. That contrasts with secured credit cards, where the security deposit can’t be used to pay off your balance.
Since you can only spend what you’ve loaded with a prepaid card, there are no interest charges. In addition, some prepaid credit cards come with benefits, such as cash back.
Do secured credit cards help build credit?
Secured credit cards are designed to help you build your credit score. They’re targeted toward people who have either a low or no credit score. As long as you use your secured credit card responsibly, you should see your credit score improve.
After you’ve deposited your security funds to your credit card, you’ll be able to use your card. Just charge purchases to your card and pay off your bills in full and on time when your statement is due. These two steps are vital since your payment history, and credit utilization ratio are major factors that determine your credit score.
For reference, your credit score is a number between 300 and 900. The higher your credit score, the more creditworthy you are. According to Equifax Canada, a good credit score is at least 660. If your credit score falls below that number, you’ll likely want to get a secured credit card.
Who should consider a secured card?
Secured credit cards aren’t for everyone, but there are a few situations where they make sense.
You’re looking to rebuild your credit score: If you’ve filed for bankruptcy or a consumer proposal and you want to improve your credit score, then a secured credit card is the way to go.
You have no credit history: Students and newcomers to Canada may not have an established credit history. By applying for a secured credit card, you can slowly improve your credit score.
You’re a victim of identity theft: If your identity has been compromised, you may not get approved for new credit until you get the fraudulent charges and accounts removed from your history. A secured credit card could be a temporary solution that allows you to make purchases on credit.
Best Credit Cards for Bad Credit in Canada
Even if you don’t have the best credit history, it’s still possible to get a credit card. In fact, it’s recommended you get a credit card since it can help you rebuild your credit score. Here are the best credit cards for bad credit in Canada.
No annual fee
Credit building option ($10 a month)
Earn cash back on eligible purchases
Earn interest on your entire balance
Virtual card available
KOHO is a prepaid card, similar to a secured credit card, that doesn’t normally build your credit. However, if you subscribe to the Credit Building option for $10 per month (six-month minimum), your credit history will be reported to the credit bureaus. With this feature, you’re given a line of credit with KOHO. As you make your payments, your credit score can be positively impacted. Keep in mind that if you miss payments, it can hurt your credit score.
What makes KOHO appealing compared to secured credit cards is that you get some decent benefits. The base card gives you 1% cash back on groceries, bills and services. In addition, all of the funds loaded to your card earn you interest. That’s pretty good for a no-fee card.
Those looking for more benefits can subscribe to KOHO’s Premium plan. For $9 a month, you get 2% cash back on groceries, transport, eating & drinking. All other purchases earn you 0.5% cash back. Plus, you’ll earn higher interest on your entire balance. Another perk is that Credit Building costs just $7 per month if you’re subscribed to a Premium plan.
Capital One Guaranteed Secured Mastercard
$59 annual fee
$75 or $300 security deposit required
19.80% purchase interest rate
Zero liability protection
The Capital One Guaranteed Secured Mastercard is a popular choice since it’s easy to get approved. You need to be at least the age of majority where you live. You also can’t have an existing Capital One account or pending application.
Finally, to be approved, you must not have applied for a new Capital One account in the last 30 days or had one that wasn’t in good standing in the last year.
Home Trust Secured Visa Card
No annual fee
19.99% purchase interest rate
Zero liability protection
Available with Apple and Google Pay
Those looking for a secured credit card that uses the Visa network should consider the Home Trust Secured Visa Card. The card has no annual fee, and your credit limit is based on your security deposit. How much you put down as your deposit is up to you, but it must range from $500 to $10,000. That deposit is fully protected since Home Trust is a member of the Canada Deposit Insurance Corporation, so your money is insured. Note that this card is not available to residents of Quebec.
How to apply for a secured credit card
First, refer to the list above and choose one of the best credit cards for bad credit. Once you’ve decided, follow these steps:
Apply for the card: Even though secured credit cards are almost guaranteed, you still need to formally apply for the card. Don’t forget you’ll need to meet the basic requirements to be approved.
Activate your card: Once your card arrives, activate it so you can load your security deposit.
Make your deposit: If you’re applying for a secured credit card, you’ll need to make a security deposit before you can use your card. This is normally done through your online banking or e-transfer.
Make purchases: Once you have made your security deposit, you can start charging purchases to your card. Remember, your limit is usually tied to the number of funds you deposited.
Pay your bills: Every month, your bill will arrive. Be sure to pay it off in full before the due date.
Once your credit score has improved, you can apply for an unsecured credit card. At this time, you won’t need your secured card anymore, so you might as well close your account. Your security deposit would be returned to you, usually in the form of a cheque.
Barry Choi is a personal finance expert based in Toronto who makes frequent media appearances. His website Money We Have is one of Canada's most trusted sources for all things related to money and travel.