Simply put, if you live in Canada, you will require a credit card. Credit cards are frequently the only option for booking a hotel room, renting a car, making online purchases, and a variety of other activities. As a result, being unable to obtain one can be crippling in a variety of ways.
There are several reasons why someone may not be eligible for a standard credit card, such as being a recent immigrant or having a low credit score. Fortunately, there are alternatives.
What is a Secured Credit Card?
For those who have been turned down for a traditional credit card, a secured credit card is a popular option. This is simply credit that is backed by a security deposit rather than a good credit report.
If the borrower is unable to pay the bill, the cash security deposit protects the credit card company. The following are the benefits and drawbacks of secured cards.
Security Deposit
One of the most important aspects of a secured credit card is that the required security deposit is usually one to two times the available credit limit. This means that if you want a $500 spending limit, you will have to pay a $500 to $1000 security deposit up front.
Will I Get My Deposit Back?
Once you have the debit card, the security deposit funds are no longer available to you, but you can get them back at the end if everything goes well with your payments.
When you qualify for an unsecured credit card, the refundable security deposit is usually placed in a guaranteed investment certificate to earn interest, which is given to you along with the cash deposit.
Fees & Interest
Secured credit cards are not immune to the fees and interest payments associated with most unsecured card options. Setup and annual fees are common, though setup fees are often minimal (3% of the credit limit), and there are secured card options without annual fees.
These cards also have higher interest rates, which are typically around 19.99%. Variations of all of these costs exist, so the key is determining what is best for you. You can look at what credit card companies and alternative lenders have to offer.
Re-establishing Credit
The most appealing aspect of using a secured credit card is the ability to use a credit card and re-establish a good credit score for people who do not qualify for a more traditional card. The idea is to manage your payments well so that you can qualify for a regular card and get your deposit and interest back in a year or so. Meanwhile, you can enjoy all of the benefits of having a credit card, such as online purchases, while also helping yourself by rebuilding your credit.
Staying Within Your Limit
Secured credit cards can be a welcome relief for those who have a history of being unable to pay their credit card balance. Borrowers are much less likely to exceed their credit limit and be unable to pay it off because the money has already been paid.
Secured credit cards are an excellent way to improve your credit while also increasing the bank’s and major credit bureaus’ trust in you as a borrower.
Respect Your Limits and Enjoy the Rewards Fast
Of course, with higher interest rates, it is critical to make timely payments. You will fully benefit from this benefit and receive the rewards quickly if you use your credit wisely and avoid late payments.
Secured cards may be a good option for you, depending on your situation. Secured cards are a great option if you have cash for a deposit but lack the credit payment history required for the more traditional route.
Low Risk for High rewards
Not only can you re-establish a good credit score with little risk, but you can also enjoy the financial freedom that a credit card provides until you are issued a regular card. Despite the minimum security deposit and additional activation fees, secured cards are an appealing option for many Canadians looking to improve their financial health who have a bad credit history. If you want to know what other options you have for quickly rebuilding your credit, check out our online loan solutions!
