What’s the Difference Between a Secured and an Unsecured Credit Card?

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Last updated on August 15, 2021

Credit cards are more than just a convenient tool for modern living. They also help you build up your credit score so you can prove to lenders that you are a responsible borrower who should qualify for a favourable interest rate on a loan or mortgage. For anyone who may have difficulty obtaining a traditional unsecured credit card—including those who are just starting out, who are new to Canada, or who’ve had previous credit problems—a secured credit card is a great option to establish or rebuild credit.

What Is a Secured Credit Card?

As the name implies, a secured credit card is backed by a security deposit that you provide to a bank or other financial institution that issues the card. It is a guarantee to the lender that, if you fail to make your credit card payments, it can take the simple recourse of claiming your security deposit to cover the outstanding bills. Because this eliminates any risk to the bank, a secured credit card is very easy to obtain—even for those with bad credit or without a reliable income.

The deposit amount required for a secured credit card depends on your credit limit. It could be as low as the credit limit itself, or may be twice that amount. So, for a card with a $500 limit, the required deposit would likely be somewhere between $500 and $1,000. The deposit is refundable, meaning that so long as you make your payments and keep your account in good standing, you will eventually get that money back once you close the account.

Making your payments on a timely basis is also the best method to rebuild credit, since secured credit cards report to credit bureaus such as Equifax and TransUnion in the same manner that conventional unsecured credit cards do.

How Does a Secured Card Work?

Secured credit cards work exactly like any other credit card. You are responsible for making a minimum payment on your credit charges each month by your due date. If you don’t pay your balance in full, you’ll be charged interest on the outstanding balance. Depending on the card you choose, there may or may not be an additional setup fee and/or an annual fee.

You cannot use your security deposit to pay your credit card bills. The deposit is held by the bank and you have no access to that money until your account is closed. With some cards, however, you can request for the deposit be kept in a savings account or GIC, so that your money continues to earn interest.

Be aware that secured credit cards often charge higher rates of interest than unsecured credit cards, and they do not offer “extras” such as travel reward points or extended warranties. As such, once you get your credit score high enough, you will likely want to pay off your balance on the secured credit card, get your deposit back, and switch to an unsecured card. The Home Trust Secured Visa is a good example of a popular secured credit card in Canada. It has no annual fee, a 19.99% purchase interest rate, and its credit limit ranges from $500–$10,000. An alternative is the Refresh Financial Secured Card*, which has a lower purchase interest rate of 17.99% and a slightly wider credit range of $200–$10,000, but comes with an annual fee of $48.95 ($12.95/annual fee + $3/maintenance fee per month).

* This card is owned and issued by Digital Commerce Bank pursuant to license by Visa International. Use of the card is governed by the agreement under which it is issued. The Visa Brand is a registered trademark of Visa International. All credit and approvals are provided by Refresh Card Solutions Inc. Digital Commerce Bank provides no credit or loans. All funding and lending for this program is provided by Refresh Card Solutions Inc.

What Is an Unsecured Credit Card?

Unlike a secured card, an unsecured credit card does not have cash or other assets backing it as collateral. Its issuer therefore has no guarantee that it will get the money back that it lends you, and must trust you based on your creditworthiness alone. Because the card’s issuer is taking a larger risk when it extends credit with an unsecured card, requirements for an unsecured card applicant’s credit score, income, and overall financial health are stricter.

There are far more unsecured than secured cards cards in the Canadian market, and they come in many varieties. In an effort to be competitive with other unsecured card issuers, financial institutions might offer lucrative introductory bonuses and generous rates for collecting points, frequent flier miles, or cash back.  Alternatively, some unsecured cards may offer low interest rates, which is attractive to those who might need to make only the minimum payment on a card’s balance from time to time, rather than paying off the balance in full.

It is just as important to make timely repayments on unsecured card balances as it is to repay balances of secured cards.  As with a secured card, neglecting to make the minimum payment on an unsecured card’s balance will result in a dent to your credit score, interest charges, and ultimately the referral of unpaid debts to a collections agency. If you don’t maintain good standing, you may find it difficult to continue getting approved for unsecured cards in the future. If your credit score is below average and you’re not sure if it’s realistic to be approved for an unsecured card, you might elect to apply for a credit card that is offered in both secured and unsecured versions, like the Capital One Low Rate Guaranteed Mastercard. That way if the card issuer deems that your credit score is too low for an unsecured card, you’ll still at least be approved for a secured card and your application won’t have been a waste. The Capital One Low Rate Guaranteed Mastercard has a $79 annual fee, but it comes with a low purchase interest rate of 14.9% and offers some additional features of note, like Price Protection.

What Are the Differences Between Secured and Unsecured Credit Cards?

There are advantages and disadvantages to both credit card types. Here are the main differences:

 Secured Credit CardUnsecured Credit Card
Easy to be approvedYesNo
Security deposit requiredYesNo
Builds your credit scoreYesYes
May have annual feeYesYes
May have setup feeYesNo
Earns rewardsNoYes
Additional benefits (e.g., travel insurance, extended warranty)NoYes

Who Benefits from a Secured Card?

Who Benefits from a Secured Card

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If you have no established credit or would like to use a credit card to rebuild poor credit, a secured credit card can help you prove that you are a responsible borrower. The following types of Canadians could probably benefit from using a secured card:

The Financial Consumer Agency of Canada cautions, however, that secured credit cards should only be obtained from reliable Canadian financial institutions. It recommends avoiding secured card offers from issuers outside Canada, as it would be more difficult to resolve any problems or disputes that arise.

When Can You Switch from a Secured to an Unsecured Card?

Assuming you’ve been using a secured card responsibly—paying it off each month or limiting your balance to no more than a third of your credit limit and making your minimum payments on time—your lender will likely offer you an unsecured card within about a year to 18 months.

At that point, if you have no remaining balance, you can close the account on your secured card and get your security deposit back.

Should You Go Secured or Unsecured?

In most cases, it’s wise to shop around for an unsecured credit card that offers you the lowest rate of interest and best benefits, such as reward points and free insurance or warranties. But, when those conventional credit card options are out of reach, a secured credit card is still a good option. You will have to temporarily provide a security deposit, pay a little more in interest, and be a responsible borrower—but that’s a small price to pay to establish or rebuild a credit score.

Recommended read: Credit Building Loans vs. Secured Credit Cards

Author Bio

Tamar Satov
Tamar Satov is an award-winning journalist specializing in personal finance and parenting. Her work has appeared in Canadian Living, The Globe and Mail, Today’s Parent, Parents Canada, Walmart Live Better and many other consumer magazines and websites. She is the former Managing Editor of CPA Magazine, for Canada’s Chartered Professional Accountants, and contributes to other publications for finance professionals including FORUM, for Canada’s financial advisors. Tamar is also a big proponent of financial literacy and had a long-running popular blog on the topic, sharing advice and anecdotes on her efforts to raise a money-smart kid. She lives debt-free in Toronto, with her husband and son.

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