If you have bad credit or little to no credit history at all and you’re ineligible for most credit cards, you can still improve your credit score with a secured credit card. Secured cards require you to put down a security deposit that is equal to or less than the limit of a card, depending on your credit history. The deposit acts as a security for lenders, protecting them against missed bill payments. As a credit card user with a low credit score, credit card provider’s view you as a risky borrower. By using a secured credit card, you have the advantage of using the deposit in case you can’t pay your credit card bill. In general, secured cards are usually not associated with the best rewards programs or the lowest interest, so you should always think of secured cards as a stepping-stone to other credit products. Once you’ve improved your credit, you can close your account, get your deposit back, and apply for a credit card with more benefits.
If used the right way, a secured credit card can help you rebuild your credit and become eligible for a higher limit and better rewards credit card in the future.
Here’s how to make your secured credit card work for you:
Applying for a secured credit card? Here’s everything you need to know about secured credit cards.
If you have no credit history in Canada or a low credit score, you are eligible to apply for a secured credit card. Unsecured credit cards may require a higher credit score (600 or more), so secured credit cards are a better option if you’re looking to rebuild or establish your credit history. In order to obtain a secured credit card, you are required to put down a security deposit. The security deposit can range from $200 to $1000 depending on your current credit score and credit requirements. This security amount determines your secured credit card’s limit and acts as insurance against your spending.
Typically, yes. Credit card lenders may not always require you to have an income for a secured card, but if you’re able to show some form of income, you have a higher chance of being approved. Your ability to pay off your credit card bill is tied directly to your income, making income a determining factor for your approval.
It is easy to get secured credit cards and prepaid credit cards confused. The main feature that differentiates them is their function. When you use a prepaid card, you “prepay” the amount you are intending to spend. It is a reloadable credit card and it doesn’t help you rebuild your credit like a secured credit card does. If you want to avoid using traditional credit or debit cards, you can consider applying for a prepaid credit card. Prepaid cards are relatively easier to obtain and require no credit checks, but they won’t help you with your financial future.
If you want to improve your credit score, a secured credit card is a better option. A secured credit card functions more like a traditional credit card, but comes with the requirement of depositing a security amount.
When you responsibly use a secured credit card, your credit card activity is reported to major credit bureaus like TransUnion and Equifax. As you pay off your secured credit card bill regularly, you begin to generate a positive impact on your credit, creating a good credit history. As long as you don’t miss payments, you can continue seeing a slow and steady increase in your credit score.
With your security deposit in place, you don't have to worry about debt collectors contacting you for missed payments on the card, but any late payments will hurt your credit score. Use your secured credit card in responsibly to rebuild your credit history.
When you apply for a secured credit card, you lay down a deposit which you are guaranteed to get back so long as your secured credit card bill is payed of when you close the account. Once you’ve decided that your secured credit card has helped you rebuild your credit score, you can close or upgrade your credit card and this will allow the lender to refund your security deposit.
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