Credit cards are the most frequently used financial products in Canada. You might be wondering, are the difference between a secured credit card and a regular credit card? One of the main differences is that a cash deposit is required to secure the credit card, as the name implies. Furthermore, secured credit cards have different uses that a regular credit card would not be suitable for.
What Is a Secured Credit Card?
A secured credit card requires a cash deposit before getting an approval. It is also referred to as guaranteed credit cards.
Generally, your cash deposit becomes your credit card’s limit. Although it may depend on the credit card provider, there are some will require a higher cash deposit for a lower credit limit. These are designed for higher-risk borrowers that is the main reason why a deposit is required. If the credit card user defaults, the credit card issuer will keep the deposit to repay the owed balance. Other than a security deposit is required, it may work the same as the regular credit card. You may use it for purchases in-store, online, through payment processing services, and use it to pay bills.
Advantages and Disadvantages
All financial products have corresponding pros and cons. Before getting a secured credit card, it’s important to know and understand all of the advantages and disadvantages so you know what you’re getting yourself into. Below is a list of all the advantages and disadvantages of secured credit cards.
Build or Rebuild Credit. If you have no credit history or poor credit, getting a secured credit card is one of the easiest ways to build or rebuild credit.
Introduction to Credit Use. A secured credit card is a great introduction to what it’s all about especially if you are new to credit entirely. It may help you prepare for larger credit commitments in the future.
Little to No Requirements. In order to qualify for a secured credit card, you need to be the age of majority in your province or territory and have the funds available for the deposit – that’s all.
Versatile Purchase Options. Cash is a limiting payment option nowadays. Using this type of credit card, you can make purchases online, in-store, through payment processing services, and more.
High Interest and More Fees. Most secured credit card users are considered to be a higher risk in the eyes of lenders. Making the interest rates to be higher and more fees are applicable.
Doesn’t Fix Bad Financial Habits. If you’re getting a secured credit card in Canada to rebuild credit, the card itself won’t fix your bad habits. You may have to work on your spending habits which can be tough.
Can’t Access Deposited Funds. Once the cash deposit has been given to the credit card issuer, you won’t be able to access the funds until you finish the card’s term. Be sure that you may not need the cash for anything else since it will be tied up for quite some time.
When Would I Use a Secured Credit Card?
Build credit history
Rebuild credit score
Alternative to regular credit cards.
Use to make a one-time purchase
Recently moved to Canada
Secured vs. Prepaid
The major difference between a prepaid credit card and a secured credit card is where the money comes from.
When you make purchases using a secured credit card, you’re borrowing money from your credit card provider which you are required to repay later.
When you make a purchase using a prepaid credit card, you’re using your own money. Your prepaid cards are loaded with your own money or savings that you can later use to make purchases. You may not use your prepaid credit card for borrowing money with your card provider.
When you use a secured credit card, the payments are reported to the credit bureaus, which can help build your credit.
Can Your Secured Credit Card Application Be Rejected?
It may come to a surprise, but there are some cases that one was denied for a secured credit card. Despite, providing a deposit to your lender for security, certain factors for your application for a secured credit card to be denied. Bankruptcies, accounts in collections, multiple missed payments, etc. can cause your application to be denied by some lenders. If you wanted to know as to why your lender has rejected you, you have the legal right to ask for an explanation. It is important to ask, to help you with direction on what you should be trying to improve.
Capital One Guaranteed Secured Mastercard
Annual Fee: $59
Interest Rate: 19.8%
Minimum Deposit: $75
They have the lowest minimum deposits on the market making it easier to commit to. However, the low minimum deposit is offset by the annual fee and high-interest rate.
Refresh Financial Secured Visa
Annual Fee: $12.95
Interest Rate: 17.99%
Minimum Deposit: $200
They have low annual fees. They also guarantee approval because they do not perform credit checks, only the minimum deposit is required.
TD Secured Credit Card
Annual Fee: $29
Interest Rate: 19.9%
Minimum Deposit: $500
The TD secured credit card requires a deposit upfront and becomes the credit limit. The annual fee and interest rates are higher, but there are other unique benefits to using this card. Once you successfully pay continuously without lapses for seven months, you may eligible for a regular card.
Home Trust Secured Visa Card
Annual Fee: $0 or $59
Interest Rate: 19.99% with no annual fee, 14.9% with an annual fee
Minimum Deposit: $500
If you are prepared to pay your balance in full every month, this is an ideal card for you. There is no annual fee if you agree to a higher interest rate. The maximum credit limit is $10,000 and a second user can be added to the account.
Vancity enviro Secured Visa Card
Annual Fee: $0 – $395
Interest Rate: 11.25% or 19.50%
Minimum Deposit: $500
This secured credit card works differently than other secured cards. To start you will need to open a Vancity TFSA or high-interest savings account at least $500. Your investment will act as your security and you’ll be given a credit card with a limit equal to your investment. Another benefit is that you’ll be able to earn interest on the security amount because it’s been invested.
Secure a Better Financial Future
Regardless of your financial situation, a secured credit card is the best way to build or rebuild credit and is a great introduction to credit in general. There will be annual fees and interest rates to consider along with establishing and improving financial habits. Secured credit cards are simply the best tool to secure a better financial future. Whether you are still looking for the best credit cards in Canada or you were able to apply for a credit card. It is important that you shop and look for the card that suits you. Travel cards, rewards card, cash advances may or may not possible for unsecured credit cards but finding the best credit cards in Canada may help you to improve your credit score.