Why Do Secured Cards Exist — And How Do They Help?
A credit card is one of the simplest ways to build credit, but you often can’t get a credit card without a good score.
Secured credit cards can help people with bad or short credit histories escape this paradox. Here’s what you need to know about secured credit cards and how they differ from regular, or “unsecured,” cards.
What is a secured credit card?
A secured credit card is typically intended for people with bad or limited credit. Instead of relying on an applicant’s credit history to determine eligibility, issuers require a cash deposit as a kind of collateral against non-payment. If the cardholder doesn’t pay their bill, the issuer can use the security deposit to cover the remaining charges.
Secured cards exist as a safe middle ground for both the issuer and you. Credit card companies get your business while mitigating the risk of an unpaid balance. And you get the chance to use credit and improve your score without needing great credit to begin with.
Secured Neo Mastercard helps you earn cash back up to 4% on gas and groceries along 1% on all other purchases. Get started with as little as $50. Guaranteed approval with no credit score needed to apply. Build you credit score with on-time payments. Terms and Conditions apply.
How security deposits works
Think of your security deposit, also called security funds, as a refundable safety net for the issuer. You’re giving them some upfront cash to cover your balance if you fail to pay your bill. Here are a few key features you should be aware of.
Deposits typically equal your credit limit. So, if your deposit is $200, you’ll have a $200 limit.
Deposit minimums and maximums vary by issuer. Minimum security deposits for secured credit cards in Canada generally range from $50 to $500. Maximum security deposits can be as high as $10,000. A large security deposit will give you a higher credit limit, which can help keep your credit utilization ratio low (a key factor in improving your score). However, a higher limit may encourage more spending and will also tie up money that could be earning interest in a savings account.
You typically get the deposit back when you close the account. If you or the card issuer close the account, any security funds that are not used to settle unpaid balances will be returned to you. It can take up to 150 days to receive your funds, depending on the issuer.
Security deposit ranges for secured cards in Canada
Deposit requirements vary by issuer. Here are examples from some secured cards available in Canada (minimums and maximums can change, so always confirm current terms before you apply).
Card issuer | Required security deposit* |
|---|---|
Home Trust Secured Visa Card (including no-fee version) | Min: $500 Max: $10,000 |
Capital One Guaranteed Secured Visa | Min: $75 Max: $2,500 |
Secured Neo Mastercard | Min: $50 Max: $10,000 |
Secured Cathay World Elite Mastercard | Min: $200 Max: $10,000 |
Secured Tims Mastercard | Min: $50 Max: $10,000 |
enviro Secured cards | Min: $500 Max: Not stated |
ATB Alberta Mastercard - Secured | Min: $500 Max: Not stated |
Secured vs. unsecured cards
While both cards work similarly — they can be used to purchase items, earn rewards and build credit — how they are set up and who they are best for differs.
SECURED CREDIT CARDS | UNSECURED CREDIT CARDS | |
|---|---|---|
Best for | People with limited or damaged credit history who can provide a security deposit and want to build or rebuild their credit over time. | People with established, good credit who want higher limits, rewards or extra perks without putting down a deposit. |
Security deposit | Required. | Not required. |
Credit limit | Based on your deposit. | Based on your credit history. |
Hard credit check | Not always required, as the security deposit reduces risk for the issuer.* | Almost always required. |
Does your credit score determine eligibility?** | No. | Yes. |
Credit reporting | Yes. | Yes. |
Earns rewards | Sometimes, but not common. | Often (the type of rewards depends on the card and issuer). |
What about prepaid cards?
Prepaid cards may seem similar to secured credit cards — you have to pay money before you can use them, and both typically come with a Visa or Mastercard logo. But they are very different products.
With prepaid cards, you’re using your own money to make purchases — not credit. You load your money onto the card, and it uses that money to pay for your purchases.
Since these cards don’t use credit to make purchases, your account activity isn’t typically reported to the credit bureaus. This means you can’t rely on building a credit history with a prepaid card.
Prepaid cards do not charge interest like secured credit cards do as you don’t owe the issuer money at the end of the month. So, there’s less chance of overspending and racking up debt with a prepaid card.
If you have low or bad credit and improving your score is your goal, a secured credit card is your best bet. If you just need a cash-alternative payment method, consider a prepaid card.
How to choose a secured credit card
Seek cards that report to the credit bureaus: Reporting is what actually builds your credit history, so be sure that the issuer will report your payments to at least one of Canada’s main credit bureaus — Equifax Canada and TransUnion Canada. If your payments aren’t reported, the card won’t have any impact on your credit.
Find a minimum deposit you can afford: Remember, your security deposit is only returned once the account is closed, so it needs to be an amount you can live without for a while. If your cash flow is limited, a card with a lower deposit requirement might be best for your budget.
Compare fees: When building credit, it’s a good idea to avoid cards with annual fees if you’re trying to keep your expenses down. However, if you can afford it, and want a card that earns rewards, for example, then an annual fee may be worth it.
Check if the issuer allows upgrades: Some providers may automatically offer an upgrade to an unsecured card — otherwise known as a traditional credit card — after a period of responsible usage.
Compare perks, rewards and other benefits: The primary purpose of a secured card is to build credit, so rewards and perks should be of secondary concern. However, benefits like cash back and travel perks can save you money when used wisely — just be aware that cards with rewards tend to come with an annual fee.
Be aware of approval timelines: Secured cards generally don’t offer instant approval because you need to wait for the security deposit to be transferred to the issuer. That said, approval for secured cards is typically all but guaranteed as long as you meet the basic requirements (like being the age of majority and a resident of Canada) and provide a deposit.
How to build credit with a secured credit card
In most cases, following these basic guidelines will help boost your score, allowing you to qualify for an unsecured credit card and other loan products in the future, should you need them.
Keep charges to a minimum. Check your account regularly to make sure you’re within your credit limit, typically the amount of your security deposit, and stop using the card if you’re getting close. If you exceed the secured credit card’s spending limit or miss payments, your credit score could drop, and your provider may use your deposit to cover the outstanding costs.
Pay your bills on time and in full. Payment history has a big impact on your credit rating, making up 35% of the overall score. That’s why it’s essential to always pay your monthly balance on time. Though the minimum payment may be all that’s required, paying the full balance of your credit card bill each month is the best way to ensure you don’t accumulate high-interest debt.
Monitor your credit score. Monitoring your credit score can help you see if your secured credit card usage is having the desired effect. In Canada, Equifax offers free credit reports and scores, and TransUnion offers free credit reports (called consumer disclosures). TransUnion also provides free scores to residents of Quebec. Checking your report regularly is a good money management skill for anyone to have. It will help you catch mistakes or — worse yet — accounts you didn’t apply for, which could be a sign of credit fraud.
Upgrade to an unsecured credit card, if available. Some issuers allow cardholders to upgrade to an unsecured version after they’ve shown their ability to manage the secured card responsibly. You’ll get your deposit back and may have access to higher credit limits. When you and your credit score are ready, you may also want to explore the much wider range of unsecured credit cards on the market.
DIVE EVEN DEEPER
Shannon Terrell
Georgia Rose