What is a secured credit card?
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Updated: August 15, 2024
If you have poor credit—or no credit history—and want to get a credit card, you may think you’re out of luck. But even if you’re turned down for a traditional credit card (aka an unsecured credit card), you may still be eligible for many of the best secured credit cards.
While you will need to put up collateral in the form of a security deposit, a secured credit card can help you establish credit if you’re just getting started out or if you’re a newcomer to Canada and don’t have a Canadian credit history. And, if you have poor credit, it can help you boost your credit score so you can eventually graduate to a traditional credit card with better terms.
What is a secured credit card?
A secured credit card means the card is backed by a security deposit you’ve made to the card issuer (such as a bank or other financial institution). So, if your account is delinquent, the lender can use your security deposit to cover the balance. Essentially, it serves as collateral, so there’s less risk for the lender. That’s why it’s possible to get a secured credit card, even if you don’t have great credit.
The credit limit is typically equal to the security deposit (so a $500 credit limit will require a $500 deposit). So long as you keep your account in good standing, you can get your deposit back when you eventually close the account—after, hopefully, graduating to an unsecured credit card that doesn’t require a deposit.
How does a secured credit card work?
A secured credit card works just like a traditional credit card—with the exception of having to put down a cash security deposit. At that point, you can use your card to pay for purchases wherever credit cards are accepted, both in-store and online. Each month, on the due date, you’re responsible for making the minimum payment on your balance.
If you carry a balance, you’ll be charged interest on that balance (and if you miss payments, your interest rate could be jacked up). Keep in mind that you can’t use your security deposit to pay off your balance—you won’t see that money again until you close your account (and only if your account is in good standing). In most cases, your activity will be reported to one or both Canadian credit bureaus, which can help you build or rebuild credit.
With a secured credit card, it’s important to note:
- A credit check may be required to get a secured credit card, but the eligibility barriers are very low, and the vast majority of applicants are accepted.
- Unlike a prepaid card, with a secured credit card your purchases will be subject to interest, so you need to stay on top of paying off your balance each month.
- As you pay off your secured credit card bill each month, or at least make the minimum payment, their credit score will gradually increase.
Pros and cons of secured credit cards
Pros
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Credit building: They’re an excellent tool for building or rebuilding credit. Responsible use, including timely payments, is reported to credit bureaus, positively impacting your credit score.
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Easier approval: Since they're backed by a security deposit, secured cards are much easier to get approved for, even with a bad credit history or no credit history at all.
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Controlled spending: The credit limit is typically set by the amount of your deposit, helping you manage spending and avoid accumulating large debts.
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Upgrade opportunities: Many secured cards offer the possibility to graduate to an unsecured card after demonstrating responsible usage over time which can be faster than other credit building programs.
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Global acceptance: Secured cards from major brands like Visa or Mastercard are widely accepted, just like traditional credit cards.
Cons
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Security deposit: You need to provide a cash deposit upfront, which can be a hurdle if you don’t have the cash.
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Lower credit limits: The credit limits are often tied to the amount of your deposit, limiting the potential of your card.
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Fees and interest rates: Secured cards may come with higher, variable interest rates and additional fees, including annual fees, which can add to the cost of using the card.
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Limited rewards and perks: They often lack the rewards or perks that many unsecured cards offer, like cash back, points, or travel benefits.
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Risk of debt: While the deposit reduces the risk for the issuer, there's still a risk of falling into debt if balances are not paid in full, leading to high-interest charges.
Advantages of a secured credit card
Since you’re paying a cash security deposit, there’s less risk to the lender, which means it’s easier to get approved for a secured credit card—even if you happen to have poor credit (or no credit history). And since your limit is determined by that security deposit, it can also help you manage your spending, so you’re at lower risk of accumulating unmanageable debt.
But one of the biggest advantages of a secured credit card is the ability to build or rebuild credit. If the lender reports to either the Equifax and TransUnion credit bureau (preferably both), responsible use of your card could boost your credit score. And you could even graduate to an unsecured card over time, which comes with more perks.
Drawbacks of a secured credit card
For most people, the biggest downside of a secured credit card is the fact you have to put down a cash security deposit—and you can’t access that money for anything else while your account is active (including paying off your credit card bill). This can also be a challenge if you don’t have the cash to make an upfront deposit.
Secured credit cards typically charge a higher rate of interest than traditional cards and may come with additional fees, such as an activation fee or annual fee. And they typically don’t come with extra perks, such as points, cash back or travel rewards—though there are some exceptions to the rule, like the Secured Neo Mastercard with a cash back rewards program offering up to 4% cash back on purchases.
Neo Credit and Neo Secured Credit cards are issued by Neo Financial™ pursuant to license by Mastercard International Incorporated.
Show me the best secured credit cards in CanadaSecured vs unsecured credit card: What's the difference?
When it comes to secured vs unsecured credit cards, each has its pros and cons. Here are the main differences:
| Feature | Secured credit card | Unsecured credit card |
|---|---|---|
| Collateral | Require a cash deposit as collateral. | No collateral or deposit required. |
| Approval criteria | Easier to obtain, ideal for bad or no credit history. | Requires good to excellent credit history for approval. |
| Credit building | Used to build or rebuild credit; activity reported to credit bureaus. | Helps in building credit, with a stronger focus on maintaining or enhancing credit score to unlock better credit cards. |
| Credit limits | Generally lower, tied to the deposit amount. | Higher limits, based on creditworthiness and income. |
| Rewards and perks | Fewer rewards and perks, if any. | Often offer rewards like cash back, travel points, insurance coverage, discounts and other benefits. |
| Upgrade opportunities | Potential to graduate to an unsecured card with responsible use. | You can switch your credit cards anytime but you may need higher income levels or a better credit score. |
| Risk factors | Deposit at risk in case of default, but lower risk of accumulating unmanageable debt. | Higher risk of debt accumulation without proper use; no deposit at risk. |
In summary, secured credit cards are a stepping stone for those looking to establish or repair credit, requiring a deposit for security and typically offering lower credit limits. Unsecured cards, on the other hand, are geared toward individuals with established credit histories, offering higher limits and rewards but requiring higher credit scores for approval.
Show me the best credit cards in CanadaSecured vs prepaid credit cards: What’s the difference?
| Feature | Secured credit cards | Prepaid credit cards |
|---|---|---|
| Quick summary | Function like traditional credit cards, allowing borrowing up to a set limit. | Operate like debit cards, using preloaded funds without borrowing. |
| Credit building | Help build or improve credit score; activities reported to credit bureaus. | Do not contribute to credit history; activities not reported to credit bureaus. |
| Deposit | Require a refundable security deposit, determines credit limit. | No deposit required; spending limit is the amount of money loaded onto the card. |
| Fees and interest | May have annual fees and interest on carried balances. | No interest charges, but may have fees like activation or reloading fees. |
| Spending limit | Credit limit typically set by the amount of the deposit. | Spending limited to the preloaded amount; no credit is extended. |
| Risk of debt | Potential risk of debt accumulation if balances aren’t paid in full. | No risk of debt accumulation; only existing funds are used. |
Secured credit card FAQs
Vawn Himmelsbach is a journalist who has been covering tech, business and travel for more than two decades. Her work has been published in a variety of publications, including The Globe and Mail, Toronto Star, National Post, CBC News, ITbusiness, CAA Magazine, Zoomer, BOLD Magazine and Travelweek, among others.
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