A good credit history is important for everyone. It’s a gateway to more borrowing options and the basis of a positive financial future. But what if you have no credit, or some unfortunate marks on your record make it hard to get a new card?
That’s where a secured credit card may come in. It can help to build good credit, even when other lenders have turned you down. It’s a good idea to know the full details of signing up for a secured card, so you get the best deal to help improve your financial situation.
How Does A Secured Card Work?
To get a secured card, you give the cash value of your credit limit to the company. So if your limit is $500, you’ll have to pay $500 before you can begin using the card. This protects the lender in the event of default.
The amount of security you have to provide depends on the card issuer, but many secured credit cards have modest limits of a few hundred dollars and therefore require modest security.
What Happens to Your Security Funds?
Your funds are held by the card issuer. Normally you will gain interest on the funds. Some chartered banks or credit unions may offer to put your security funds in an investment like a GIC. Typically, you cannot access these funds as long as they act as security against your credit card limit. If you close the card or miss a payment, the issuer may use the security funds to pay off the balance.
You should get your security funds back at some point. But exactly when that happens depends on the credit card company. Some will give back the security only when the card is closed. Others will release the security after a certain period of time, like one-two years of good history of payments.
Does the Lender Matter?
Both chartered banks and other lenders offer secured cards. Although your bank does not advertise the secured option, it may still be available — you just have to ask. Some experts have said that there are benefits of getting a card through your bank. By establishing a strong credit history with them, you may have more opportunities among financial products they offer.
Also, a bank may agree to eventually release the security funds without cancelling the card. In contrast, another lender may not do so until you close the account. This matters because open credit card accounts make for a stronger credit card rating than inactive accounts. That’s the case even if you never use the active card and the cancelled account was closed in good standing.
Who Should Consider One?
A secured card may be a good option for anyone who wants to reestablish good credit. When a secured card shows up on a credit report, it is usually indistinguishable from an unsecured card.
If you have had a recent bankruptcy or challenging financial times, a secured card can get you back on a better path. It’s also good for those who have no credit history. Newcomers to Canada and students may also want to look into this option, although many financial institutions have other products for these individuals that do not require security .
Review Your Optons
There are many choices when it comes to secured credit cards. Check out some of the best secured credit cards to find the right one for you!