The secured credit card is one generally targeted to those with little or no credit history, with low credit scores or for customers who have previously filed for bankruptcy. Recent immigrants to Canada who want to start building a credit history often consider the secured credit card option.
To obtain a secured credit card, one is usually required to provide the card issuer a security deposit before being able to use the card. The credit limit for the card usually depends on the amount of the deposit or a percentage of the deposit; in many cases it's 100 percent of the actual security deposit.
The secured credit card issuer is basically using the deposit you contribute as a form of collateral. Therefore, the deposit made is not available to you to pay towards the credit balance you accumulate as you use the card. If the cardholder is unable to keep up with repayment obligations and the account falls into arrears, the credit card issuer may choose to use the deposited funds for payment.
As you use the card responsibly, pay off balances accordingly or meet the payment requirements set out by the credit card company, you develop a credit history.
Once a good credit score is established, you have a better chance having the security deposit requirement waived or obtaining another personal credit card such as a rewards credit card or even other credit products such as a line of credit or mortgage loan.
Even though secured credit cards are a valuable tool for those who've been turned down for other types of credit and are in some ways an ideal solution to building up a credit score, there may be additional fees associated with acquiring one.
That's why it is important to shop around for the right secured credit card to ensure you're not paying more in fees and charges than you should. Some card issuers will charge an application fee. Others may have higher interest charges or heavier late payment penalties. On the positive side, some card issuers might pay interest on the sum you have on deposit.
In the process of comparing secured credit cards, be sure to find out how long your deposit is needed by the credit card issuer before you could become eligible for an unsecured credit card. Some companies may require you to have the money locked in for more than one year.