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How Secured Credit Cards Can Fix Your Credit Score

Nov. 21, 2012
2 mins
A person taps their credit card on a point of sale terminal

It’s quite the catch-22; qualifying for a credit card requires a good credit score - but you can’t improve your credit score without a history of good payment habits on your credit card. It’s a vicious circle for those with poor credit ratings - and it also presents a conundrum for newcomers to Canada without a credit history at all.

Fortunately, options do exist for those in need of a credit boost, in the form of guaranteed approval and secured credit cards.

Secured Vs. Non-Secured Debt

Traditional credit cards are referred to as non secured. This means the lender is offering you an extension of credit based on good faith - and your pristine credit score, which proves you aren’t a shabby credit risk that’s likely to default on the money loaned to you.

Secured credit cards, on the other hand, make you put your money where your mouth is, requiring an amount paid up front as collateral in exchange for the credit. This amount is kept on the balance of the card, and cannot be withdrawn as long as the card is in use. The lender will then grant you a credit limit of the same amount, or slightly higher in some cases. The only way to receive back the money put toward the collateral is to pay the card’s balance in full, and close the account with the lender.

Secured Credit Card Features

Aside from the upfront payment, secured credit cards operate in the exact same manner as a traditional card. Options are offered by both MasterCard and Visa, and are accepted at the same retailers - in most cases, the card will even look the same as its non secured counterparts. Billing will also occur monthly, with interest charged to any balance you may carry. The main difference lies in the credit limit - while it can be quite easy to request an increase for a non-secured card, secured credit card lenders may require a proven history of good behaviour on the card, or an increase of the collateral amount first.  Another downside is that secured options often come with a higher interest rate than many other options on the market.

It’s NOT a Prepaid Credit Card

A common misconception is that secured credit cards and prepaid credit cards are one and the same - and it can be easy to assume so, as they both require a payment to establish their spending limits. One very clear difference though, is that secured credit cards report your payment behaviour back to the credit bureaus, and prepaid cards do not. This is absolutely vital - as you use your secured credit card, you’ll be creating a history of responsible use of revolving debt - the stuff good credit scores are made of.

Looking for even more ways to improve your credit score? Our LEARN section is chock full of them!

Penelope Graham

A first-time homeowner and newbie investor, Penelope Graham is the quintessential millennial, navigating the world of personal finance and wealth management. A self-professed monetary policy nerd, she follows the often-controversial housing market closely and specializes in mortgage, credit card and personal finance news.

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