A credit card can be a huge help in life and assist people with paying for emergencies, or making purchases online or in-store. These cards have great benefits too, including cash-back, access to exclusive deals or events, and rewards to boot. The big names are VISA, Mastercard, and American Express. When most people get a credit card, it is unsecured: these come with a credit limit and as long as you stay under that limit and make your payments on time, you’re good.
However, not everyone will be able to qualify for these types of credit card, and not because of some terrible reason. If you don’t have a credit history in Canada, or if you have a negative credit history from past mistakes, it may be hard to qualify for an unsecured credit card. This is due to lenders seeing you as more risky than someone with years of using credit effectively. Thankfully, if your credit is poor or non-existent, that doesn’t mean you can’t get access to credit. You may need to instead opt for a secured credit card, which will help you make those same emergency, online or in-store purchases. Keep reading to learn all you need to know about secured credit cards, and how they work.
What is a secured credit card?
A secured credit card is similar to any other credit card except that the lender requires that the cardholder deposit money in advance. The amount can vary, but is generally anywhere between one to two times the credit limit. So if you want a limit of $1500, you will have to pay them somewhere between $1500 and $3000 in most cases.
The lender will keep this as collateral and then provide you with a secured credit card. Your deposit simply protects them in case you cannot pay off the balance. If you can’t or don’t pay, they will simply keep the deposit or at least a part of it, so they aren’t out any money. Because this lowers the risk for lenders, these cards are much easier to get for almost anyone, even if you haven’t been the best with credit in the past.
How does a secured credit card work?
Now that you know a little about what they are, it is a good idea to familiarize yourself with how they work. The good news is that once your deposit is paid to the lender and you have received the card, it will work nearly identically to a normal unsecured credit card. You can use them anywhere that credit cards are accepted, and if you carry a balance you will still be required to pay interest.
When it comes to how to apply for these secured cards, it is normally quite easy. You will need enough cash to pay for the deposit, and a credit check will normally be done. However, there may also be a fee to set up the card, so keep that in mind.
Who can use secured credit cards?
So, who generally uses secured credit cards? Well, the answer can vary. In most cases, there are two types of individuals who will most commonly use secured credit cards. First of all, there are the individuals with a limited credit history. If you are a young adult or new resident of Canada, or simply don’t have any credit history in Canada, some lenders may be apprehensive to approve you for an unsecured credit card. This secured card can be a good stepping stone for people to create some kind of credit history for themselves.
Next, there are the individuals who have a poor credit or financial history. Anything from a bankruptcy to a credit card spending problem can hurt people’s finances and credit score to the point where they may find it hard to apply for (and get) unsecured credit. These people may have nowhere else to turn other than towards a secured credit card.
However, because they are easier to get than an unsecured card, almost any adult (as long as they can afford the deposit) will normally be able to get a secured credit card from a local lender or bank.
The credit-building potential of secured credit cards
Secured credit cards have something that makes them a powerful financial tool. In addition to giving people with less-than-perfect credit history access to credit, secured credit cards can also help you build or rehabilitate your credit score. Your payment history is one of the biggest factors in your credit score, so by making monthly payments on your secured credit card, you are improving your standing. People can get a secured credit card, and use it long enough to build their credit to a point where they can get an unsecured credit card.
Of course, in order to build credit with these cards, they need to be used responsibly. You need to only borrow what you can afford to pay back, and always need to ensure you make your payments on-time and preferably in full. Even just a few missed payments or other problems can hurt your credit, and even lead to you losing your deposit and your credit card altogether.
As for how long it takes for a secured credit card to improve your credit, it can depend on the circumstances. For many people, it will take around a year of responsible use to build up their credit to a point where they will be able to qualify for a card that is unsecured.
It may take less than that for some people and for others with more serious financial or credit-related issues, it may be longer. While this can be a long process and one that can take some sacrifices and lifestyle changes, it will be well worth it in the end as good credit makes borrowing money in many different circumstances much easier and more affordable.
What kind of secured credit cards are available?
When it comes to getting a traditional unsecured credit card, there are plenty of options. Some are free, some have an annual fee and each has its own features like cash back, points or specific discounts. While there aren’t as many secured cards, there are still some attractive options to choose from.
They will differ in terms of their annual fee, their interest rate, and how large of a deposit they may need when setting up your credit limit. Some of the popular options include Plastk, Refresh and KOHO. Also, many banks or credit unions will offer their own, as well.
So how do you choose which to go with? Well, it comes down to your needs. You may prefer one with the lowest rate, while another person may prefer one with no annual fee. Simply put, you should do a little research and get the secured credit card that makes the most sense for your needs and the needs of your family.
The difference between a secured credit card vs. prepaid credit card
Up to this point, you have probably noted a lot of crossover between secured credit cards and a prepaid credit card. Both involve you putting up money before the bank or lender will give you the card. While there are some similarities between the two, they are actually quite different.
With a prepaid credit card, you actually pay money ahead of time to pre-load the card with the amount you want. Once the money runs out, there is no credit extension. You have to refill the card with your own money again. You are always using your own money to make the purchase, and never borrow any from the lender to use.
While prepaid credit cards don’t impact or improve your credit score but they are good for controlling and limiting your spending. That kind of behavioural change is important if you’ve had problems managing payments in the past.
Tips for using a secured credit card intelligently
Using a secured credit card is related to responsible money management and building good habits. While we briefly touched on the responsible use of secured credit cards earlier, we thought that we would provide a few additional tips. These can help ensure you get the most out of your secured credit card.
Never forget your payments
The most important part of using your secured credit card, or any card, the right way is to always remember to make your payments. Even a single missed payment could have dire consequences. Set a reminder every month on your phone or put a note in your calendar so that you will never forget to pay. If possible, pay in full as well, as that will stop you from having to pay interest. If you are forgetful, you may even be able to set up auto-pay through a bank.
Reflect on whether you want or actually need something
Few things can be as troublesome to someone with access to credit as temptation. If you see something you want, and have access to thousands of dollars instantly, some people simply can’t control themselves, and it can ruin their personal finances. Of course, with a secured credit card, you first have to give thousands of dollars to the lender in the form of a deposit. Sometimes, though, it is not the big purchases that get you in trouble. It is those little things that add up quickly like eating takeout often or buying things that weren’t on your shopping list.
If you are thinking of buying a “want” and not a necessity, always take time to crunch the numbers and see if it fits in your budget. Also, give it a few days or a week and see if you are still interested in buying the item or not.
Use the secure credit card
To build credit, it is not enough to apply for the card. You still have to use the card. If the card is not being used, you will have nothing to pay off, and your credit score will not improve. Use the credit card for bills, groceries, and anything else you need to pay for. Of course, always stay under the limit and make sure you can comfortably pay back every cent you borrowed.
Keep your credit utilization ratio low
While you have access to your entire limit every month, it would be wise not to use it all. If you constantly use up all your available credit every month, it can be worrisome to lenders and can hurt your credit score. Lenders look at all your available credit limits and how much you use of each one; this is your credit utilization rate or credit utilization ratio. A high utilization rate might worry lenders. It is a good idea to keep your credit utilization ratio at 30% of available credit limit or under every month if at all possible.
Keep tabs on your credit report
While everyone thinks and obsesses over their credit score, it is actually your credit report that holds the most importance. This report gives a detailed look at your credit currently, but also through the past. It is a good idea to get a copy of your report at least once a year and go through it. You want to look for errors and ensure everything is accurate.
Even a small or simple mistake on your credit report can have a big impact on your score going up or down. Of course, if you claim something is a mistake on the report, you need to be able to prove it, as well.
Have a budget
If you are going to use a credit card for purchasing things, it is important to have a budget. This budget should track all money you have coming in monthly, and how much you are spending. This can help you know exactly how much you can afford to spend and can really keep your finances as a whole on track.
The last thing you want is to have a big credit card bill and not have the cash on hand to pay it off. A budget can help to ensure this will never happen. Not only will this missed payment hurt your credit, but you could lose your secured credit card if your deposit needs to be exhausted to pay lenders after you miss payments.