How to Build Credit with a Secured Credit Card

Looking for a way to build a good credit score even with bad credit history or no history at all? Think about getting a secured credit card.

A secured credit card is a credit card you have made a security deposit on. You deposit a certain amount, say $1000, with your financial institution and they in turn give you a credit card with a $1000 spending limit. You must pay back the charges you make on your card or the bank will use your deposit to pay the balance.

How does a secured credit card improve a credit score?

Paying off your balance on your secured credit card each month, without the bank needing to dip into your deposit, improves your credit score. Once you have established or re-established a good credit score, your financial institution may offer you a low-rate or unsecured credit card. If you close off your secured credit card after having paid down the balance on the card, you may also receive your deposit back. 

Secured credit cards can come with high fees

Many secured credit cards also have the same features as regular credit cards, such as points programs and extra cards for co-applicants. But interest rates for secured credit cards are usually high, around 19.8%, and many charge annual fees ranging from $6 to $120. There may also be application fees and service fees. Some banks, such as the RBC, will put your deposit into a GIC or similar account, where you will earn interest on your deposit money.

Who should get a secured credit card?

Many financial institutions, such as the RBC and Capital One, advertise their secured credit cards to the following groups of people:

• People new to Canada
• Anyone applying for their first card
• Anyone who has applied for bankruptcy
• Anyone looking to improve his or her credit history

How to get a secured credit card

The Financial Consumer Agency of Canada recommends you stick to Canadian financial institutions and major credit cards when applying for a secured credit card. Other offers may limit your spending to certain stores or catalogues, while solving disputes with a non-Canadian based financial institution can be difficult.

Check your credit score through TransUnion and Equifax to make sure your report doesn’t contain any errors. You don’t want to find out, after all your hard work rebuilding your credit, that a mistake on your report is still holding you back. You will also want to find out the following from your bank when applying for a secured credit card:

• How much is the minimum security deposit?
• How often does the financial institution report my successful payments to the credit bureaus?
• Do I need to pay fees up front or is it taken out of my deposit?
• How long will it take to qualify for a regular card?
• Will the bank report your secured credit card account information to both TransUnion and Equifax (thereby building your credit history at both bureaus)?

How to use a secured credit card

The most important thing to remember about using a secured credit card is that you must pay it off on a regular basis. If you don’t, your bank will use your deposit to pay off the card until your deposit runs out. This will obviously not help your credit score! Make regular payments, however, and you will see your credit score steadily improve.