If you’re trying to build or rebuild credit and don’t think you’ll qualify for a regular credit card yet, you can learn more about secured credit cards below. Secured credit cards work differently than regular credit cards. They have unique pros and cons and additional considerations.
Secured credit cards are credit cards that require a cash deposit to use them. To obtain a secured credit card, you’ll have to deposit a particular amount of money with the credit card issuer. The deposit is typically one to two times the amount of the credit card limit.
For example, if you wanted a secured credit card with a $1,000 limit, you would need to make a deposit of $1,000 to $2,000. The deposit is security to the credit card issuer in the event that you do not repay your credit card debt.
Secured credit cards are frequently used by individuals who have no credit history or are in the process of repairing their existing credit. Other people who might use a secured credit card are new immigrants to Canada, people who want to conceal a particular purchase or individuals who aren’t old enough to apply for regular credit cards yet. Regardless of who is using a secured credit card, the primary use of them is to show lenders that you can responsibly manage debt.
As with all financial products, secured credit cards have their own set of pros and cons. Let’s explore them in depth below.
More often than not, your security deposit earns interest while you use the secured credit card. So long as you always pay your secured credit card on time and in full, the total security deposit plus earned interest will be returned to you when you hand in the secured card. If you don’t pay your secured credit card on time and in full every month, you’re risking losing your entire deposit.
A good rule of thumb is 12 to 18 months, but it really depends on the credit card provider and your credit situation. While you wait, do your best to pay on time and in full every month. You should also take the time to work on your financial habits to ensure that you’re ready for more financial responsibility when you do obtain an unsecured credit card.
Unfortunately, no one can tell you what’s right for you, you’ll have to figure that out on your own! However, secured credit cards are ideal for those building or rebuilding credit. If you can get approved for a regular credit card, that is a better option which can also help you build or rebuild credit. If not, then a secured credit card is probably best for you. Before making a final choice, assess your finances and determine which credit card type makes the most sense for your circumstances.