Guaranteed Credit Cards 101
What is a guaranteed credit card?
A guaranteed credit card works similarly to a typical credit card, but there’s one big difference: cardholders must pay security funds up front (think of it as collateral!).
A guaranteed credit card is NOT a prepaid credit card - instead, they’re an option that provides access to credit, and are a great way to build or repair your credit score.
Who should get a guaranteed credit card?
Do you need to build or repair your credit? Guaranteed credit cards are excellent options for:
- Those who have had issues with collections
- Those who are recovering from bankruptcy
- Newcomers to Canada without pre-existing credit
- Those who are trying to repair a low credit score
How does a guaranteed credit card work?
First, the cardholder must put down security funds (the collateral). This amount usually ranges from $75-$300 from a speciality lender (like Capital One), but can be much higher at a chartered big bank, which may require payment between $500 - $1,000, which may also need to be locked into a long-term deposit like a GIC.
Once the collateral has been paid to the lender, the cardholder is then granted access to a limited amount of credit.
Like regular credit cards, guaranteed credit cards have interest rates, which are applied to any purchases not paid off within the grace period. Cardholder payment histories are reported to the credit bureau in order to help establish or repair credit scores. Should you ever decide to close your account, security funds are fully refunded (provided that your balance has been completely paid off).
What steps should someone with a Guaranteed credit card follow in order to build or repair their credit?
There a few guidelines you should follow if you have a guaranteed credit card and are trying to build or repair credit:
As a general rule, try to keep your balance at half of the available limit. High utilization (ie. using all or almost all the available credit) will ultimately hurt your credit score.
Make sure to meet your minimum monthly payments if you cannot pay the entire balance every month.
Start off by using the card for small, everyday purchases and paying the balance off immediately.
How long will it take to build or repair my credit if I use a guaranteed credit card?
This can vary depending on your personal circumstances. Following the steps mentioned above can lead to an increase in your credit score in as little as 6-12 months.
DISCLAIMER: “The interest rates, fees, rewards details, benefits and other details of the Capital One product(s) described in the article may have changed since the time of publication. Please consult the product information pages on the Capital One website for accurate product details. In the event of any conflict between the product details in this article and the Capital One website, the details on the Capital One website shall prevail.”