What are the features of a secured credit card?

What are the features of a secured credit card?
May 31, 2018 northstar

If you live in Canada, you need a credit card – that’s just the reality. Credit cards are often the only option for things like booking a hotel room, renting a car, online shopping, and endless other activities. Thus, not being able to obtain a credit card can be crippling in many ways. There are several reasons someone might not qualify for a regular credit card, like being a recent immigrant or having a bad credit score. Fortunately, there are options.

A secured credit card is a popular choice for those who have been rejected for a more traditional credit card. This type of card is simply credit backed by a security deposit rather than a good credit score. The deposit protects the issuer if the borrower cannot pay the bill. Below are the features – both pros and cons – of secured credit cards.

Security Deposit

One of the most important things to understand about a secured credit card is the fact that the required security deposit is usually one to two times the available credit limit. This means that if you want a $500 limit, you will pay $500 to $1000 up front. The security deposit funds are not available to you once you have the card, but you can get them back at the end if all goes well with your payments. The deposit is usually placed in a guaranteed investment certificate to collect interest, which will be given to you along with the deposit when you qualify for an unsecured credit card.

Fees & Interest

Secured credit cards aren’t immune to the fees and interest payments of most credit card options. Setup fees and annual fees are common, though setup fees are often minimal (3% of the credit limit) and there are secured credit card options without annual fees. Secured credit cards also have higher interest rates – usually around 19.99%. Variations of all of these costs exist, so the key is finding what’s best for you.

Re-establishing Credit

The biggest draw of a secured credit card is, of course, the option to use a credit card and re-establish a good credit score when you don’t qualify for a more traditional card. The idea is to manage the payments well so that in a year or so, you can qualify for a regular credit card and get your deposit and its interest back. In the meantime, you can enjoy all the benefits of having a credit card while doing yourself a favour and rebuilding your credit.

Staying Within Your Limit

For those with a history of being unable to pay their credit card balance, secured credit cards can be a welcome relief. Since the money has already been paid, borrowers are much less likely to exceed their limit and be unable to pay it off. Secured credit cards are a great way to have peace of mind about your credit while building the bank’s confidence in you as a borrower. Of course, with the steeper interest rates, be careful to keep up with payments to fully experience this benefit.

Depending on your situation, a secured credit card might be a smart choice. If you have cash available for a deposit but are lacking the credit history for the more traditional route, a secured credit card is a great option. Not only are you able to re-establish your credit score with relatively low risk, you also get to enjoy the freedom a credit card brings until you are issued a regular card. Despite the deposit and additional fees, the secured credit card is an attractive choice for many Canadians struggling with bad credit.

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