Secured cards vs. unsecured cards: What’s the difference?

These two types of credit cards work similarly, but serve different purposes.

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Your personal financial needs will dictate whether a secured or an unsecured card will work best for you. Those with relatively healthy credit typically opt for an unsecured card that offers perks such as cash back, travel credits or rewards points. Those with poor or no credit, however, might consider a secured card. Secured cards are meant to help you build your credit so that you can eventually graduate to an unsecured credit card, making them powerful for new immigrants and those who have a history of poor credit.

What is a secured credit card?

When you get a secured credit card, you must provide your lender with a security deposit — typically $200 to $10,000, though cards with deposits as low as $75 are available. This deposit acts as collateral in case you fall behind on your payments. The amount of your security deposit is also usually your monthly credit limit.

Why might you want a secured credit card?

A secured credit card offers the opportunity to build your credit score. If you consistently make your monthly payments on time, you’ll see a gradual increase in your score and, eventually, you can graduate to an unsecured credit card that offers rewards and other desirable features. Just make sure your card provider reports your payments to both of the major credit bureaus – Equifax and TransUnion – or else your credit score won’t change.

Why do card providers require collateral?

You may be new to building credit or you might have a damaged credit score. In these cases, providers tend to view you as a riskier borrower. Collateral guarantees the provider will be repaid, making them more willing to lend you money. If you fail to repay your balance, they can use your collateral to cover any unpaid balance.

Pros and cons of secured credit cards

ProsCons
  • Get one even if you have no credit or poor credit.
  • You control your monthly credit limit.
  • Choose from monthly credit limits as high as $10,000 and as low as $75.
  • Rebuild your credit score.
  • You must put down a security deposit.
  • Cards typically come with high interest rates and annual fees.
  • Credit limit is determined by your deposit.
  • Cards tend to offer few or no rewards.

Who are secured cards good for?

Secured credit cards are best for those with no credit score or those who have a poor credit history and want to rebuild their credit score. For example, if you have fair to poor credit, you’re far less likely to get approval for an unsecured credit card. Other individuals who can benefit from secured credit cards include new immigrants, students and those with no history of credit or those who are recovering from a recent bankruptcy.

What is an unsecured credit card?

When you get an unsecured credit card, you won’t have to put down a security deposit. Instead, you’re borrowing money from the provider. In that sense, each time you use the card, you’re taking out a loan that you’re expected to pay back in order to maintain a trustworthy credit history.

If your provider accepts you as a customer, it means they’ve accessed your credit history and are quite confident you’ll repay your debts. To determine your credit limit, your card provider will gauge your ability to repay by taking a look at factors such as your income and payment history. Ultimately, the credit limit they offer you is the amount they feel you can borrow and pay back responsibly.

The importance of your credit score

Your credit score will determine many aspects of your financial future and determine your success when applying for credit cards, car loans, personal loans and a mortgage. Your credit report will include your credit score along with your credit history, which can help potential lenders determine how risky of a borrower you are.

If you have a good to excellent credit score of 650 or higher, you’re typically better off applying for an unsecured card so you won’t have to put down a security deposit — you’ll likely get better interest rates and lower annual fees too. Plus, you’ll be able to earn rewards such as cash back, points or miles and take advantage of other complimentary extras like travel insurance, concierge services and airport lounge access.

If you have fair credit — generally 600 to 649 — you may still qualify for an unsecured card. But the ones you qualify for will likely come with higher fees and less favourable interest rates.

Find out more about credit scores

How can I learn what my credit score is?

You can request a copy of your credit report from Equifax and/or TransUnion — the two biggest credit bureaus in Canada. Each credit bureau will have a unique credit report for you, which means you likely have two slightly different credit reports. This is because not all lenders will report your payment history to both bureaus and the bureaus use a slightly different algorithm to calculate your credit score, which means your scores could be slightly different.

If you request a copy via mail, you typically don’t have to pay for the report, while accessing your report immediately online will cost a few dollars. You can also sign up for a yearly membership, which allows you to monitor your credit report whenever you’d like.

You can also use an online service like Credit Karma to access your credit report. Some online services are free of charge while others require you to signup for a monthly subscription service or pay a one-time fee. Requesting your credit score from a third party service will usually require a soft pull. This inquiry may appear on your credit report but it will have little to no effect on your score.

Pros and cons of unsecured credit cards

ProsCons
  • No security deposit required.
  • Better rewards than secured credit cards.
  • Cards typically come with lower annual fees and interest rates than secured credit cards.
  • Poor terms and/or complimentary extras if you have weak credit.
  • Can severely damage your credit history if you’re not managing the account responsibly.

Who are unsecured credit cards good for?

Unsecured cards are the most common pick for consumers and offer a standard array of credit card benefits including balance transfer opportunities, rewards programs and the ability to carry a balance from month to month. Of course, you’ll still want to use your unsecured credit card responsibly since your payment habits will affect your credit score. Not paying your balance in full will take away from any rewards you’re receiving since you’ll be paying interest on the unpaid balance.

Compare secured credit cards

Name Product Required Deposit Purchase Interest Rate Cash Advance Rate Annual Fee Reward
Refresh Secured Card
$200 - $10,000
17.99%
N/A
$12.95
The Refresh Secured Card has no credit check, a low annual fee and guaranteed approval once you secure your card with anywhere from $200 - $10,000.
Take advantage of a low annual fee, with no credit check and guaranteed approval once you secure your card with some funds.
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Name Product Purchase Interest Rate Cash Advance Rate Annual Fee Minimum Income Benefits with this card Description
HSBC +Rewards™ Mastercard®
11.9%
11.9%
$0 annual fee for the first year ($25 thereafter)
N/A
Earn 2 Points for every $1 spent on eligible dining or entertainment purchases.
Earn 10,000 Points ($50 travel value). Plus, get a full annual fee rebate for the Primary Cardholder for the first year ($25 value). Apply by August 17, 2020. This offer is only available to residents of Canada other than the province of Quebec. Conditions apply.
BMO World Elite Mastercard
19.99%
22.99%
$0 annual fee for the first year ($150 thereafter)
$80,000
Get 3 BMO Rewards points per $1 spent on eligible travel, dining and entertainment purchases (up to $50,000 spend annually), and get 2 BMO Rewards points per $1 spent on all other eligible purchases (and once you reach the $50,000 annual spend).
Earn a bonus of up to 35,000 BMO Rewards points with a minimum spend of $3,000 on eligible purchases in the first three months of card membership ($250 travel value to be used towards a flight booked through bmorewards.com). Plus, get the $150 annual fee waived in the first year.
HSBC World Elite® Mastercard®
19.9%
22.9%
$0 annual fee for the first year ($149 thereafter)
$80,000
Earn 3% in travel rewards on all eligible travel purchases (6 Points per $1 spent) and earn 1.5% in travel rewards on all other eligible purchases (3 Points per $1 spent).
Earn up to 60,000 Points ($300 travel value). Plus, get a full annual fee rebate for the Primary Cardholder for the first year ($149 value). Apply by August 17, 2020. This offer is only available to residents of Canada other than the province of Quebec. Conditions apply.
BMO Preferred Rate Mastercard
12.99%
12.99%
$20
$15,000
Take advantage of an introductory balance transfer offer, annual fee waiver in the first year, and low purchase and cash advance interest rates.
Get a rate of 3.99% on balance transfers for 9 months with a 1% transfer fee. Plus, get the $20 annual fee waived in the first year.
American Express Business Edge Card
19.99%
21.99%
$99
N/A
Earn 3 Membership Rewards points for every $1 spent on eligible business essentials including office supplies, electronics, rides, gas, eats and drinks (up to an annual earn of 75,000 Membership Rewards), and earn 1 Membership Reward point for every $1 spent on all other eligible purchases
Earn up to 42,000 Membership Rewards points in your first year. Earn a Welcome Bonus of 30,000 Membership Rewards points when you spend at least $5,000 on eligible purchases within the first three months, and earn 1,000 Membership Rewards points each month (a total of 12,000 annually) when you spend a minimum of $3,000 on eligible purchases
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Funding your secured credit card

Bottom line

If you have the means to obtain an unsecured credit card, that should be your first pick when it comes time to apply for a card. However, if you don’t have credit or you have a poor credit score, compare secured credit card options to find a card that can help you build credit for the future. Spend responsibly and pay off your balance on time and you’ll soon be able to graduate to a more powerful unsecured credit card.

Frequently asked questions about secured and unsecured cards

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