Choosing between a secured versus unsecured credit card can be a pivotal decision for your financial future.
At Financial Canadian, we understand the importance of making informed choices when it comes to credit cards.
This guide will break down the key differences between these two types of cards, helping you determine which option aligns best with your current financial situation and long-term goals.
What Are Secured Credit Cards?
Definition and Purpose
Secured credit cards serve as financial tools for individuals with limited or poor credit history. These cards require a cash deposit that typically equals the credit limit. For instance, a $500 deposit results in a $500 credit limit.
How Secured Credit Cards Function
When you apply for a secured credit card, you must provide a security deposit. This deposit acts as collateral, which reduces the risk for the card issuer. The Royal Bank of Canada offers secured credit cards with deposits starting at $500, while other Canadian banks may have different minimum requirements.
You use a secured credit card like a regular credit card. You make purchases and must pay at least the minimum payment each month. Your payment activity gets reported to the major credit bureaus (Equifax and TransUnion in Canada), which can help improve your credit score over time.
Credit-Building Potential
Secured credit cards excel as tools for building or rebuilding credit. They often have less stringent qualification requirements than unsecured cards, making them accessible to those with low credit scores or no credit history.
To maximize the credit-building potential of a secured card:
- Pay all bills on time
- Keep your credit utilization below 30%
- Use the card regularly for small purchases
Limitations and Considerations
While secured credit cards offer a path to better credit, they come with some drawbacks:
- Higher fees: Many secured cards charge annual fees (ranging from $20 to $120 per year)
- Lower credit limits: Your limit typically equals your deposit, which may be lower than unsecured card limits
- Higher interest rates: The average APR for secured cards in Canada hovers around 19.99%, exceeding many unsecured options
- Opportunity cost: Your deposit remains tied up and doesn’t earn interest
Secured credit cards should be viewed as a stepping stone. Once you improve your credit score, you can transition to an unsecured credit card with better terms and benefits. This transition leads us to explore unsecured credit cards and their distinct features in the next section.
What Are Unsecured Credit Cards?
Definition and Key Features
Unsecured credit cards do not require a security deposit, unlike their secured counterparts. These financial products extend credit based on the cardholder’s creditworthiness, income, and other financial factors.
How Unsecured Cards Operate
Card issuers provide a line of credit without the need for collateral. The average credit limit per adult Canadian has grown at a rate of 10.2 percent according to consumer trends reports.
Qualification Requirements
The approval process for unsecured cards is more rigorous than for secured cards. Most Canadian banks and credit card companies require a credit score of at least 650 for approval. Premium cards may set the bar higher, often demanding scores of 720 or above.
Income requirements vary widely across different card offerings:
- BMO CashBack Mastercard: Minimum annual income of $15,000
- Scotiabank Gold American Express Card: Minimum annual income of $12,000
- BMO eclipse Visa Infinite Privilege Card: Minimum annual income of $150,000
Advantages of Unsecured Cards
Unsecured cards often come with attractive perks and rewards programs. For example:
- CIBC Dividend Visa Infinite Card: Up to 4% cash back on gas and grocery purchases
- TD First Class Travel Visa Infinite Card: 9 TD points per $1 spent on travel through Expedia For TD
Many unsecured cards also offer insurance benefits. The RBC Avion Visa Infinite Card includes travel medical insurance, trip cancellation insurance, and mobile device insurance, adding substantial value for cardholders.
Potential Risks and Considerations
While unsecured cards offer numerous benefits, they also come with potential pitfalls:
- High interest rates: The average APR in Canada hovers around 19.99%. Some cards, like the MBNA True Line Mastercard, offer lower rates (around 12.99%), but these are exceptions.
- Consequences of late payments: Missing a payment can result in late fees (typically around $29) and significant credit score damage. Equifax Canada states that a single late payment can lower a credit score by up to 150 points.
To maximize the benefits of an unsecured card while minimizing risks, try to pay your balance in full each month. This practice helps avoid interest charges and maintains a healthy credit score.
As we move forward, it’s important to compare secured and unsecured credit cards side-by-side to understand which option might be best suited for your financial situation and goals.
How Secured and Unsecured Cards Compare
Credit Score Requirements
Secured credit cards have more lenient credit score requirements. Generally speaking, Canadian credit card companies prefer a credit score of 660 or above, but exact scores vary by card type and applicant. The Refresh Financial Secured Card has no minimum credit score requirement, making it accessible to those with poor or no credit history.
Unsecured cards demand higher credit scores. The TD Cash Back Visa Infinite Card typically requires a credit score of at least 660. Premium cards like the American Express Platinum Card may require scores of 720 or higher.
Fees and Interest Rates
Secured cards often have higher fees and interest rates. The Home Trust Secured Visa Card charges an annual fee of $59 and has an interest rate of 19.99%. Some secured cards, like the Capital One Guaranteed Secured Mastercard, offer no annual fee options but maintain high interest rates.
Unsecured cards can offer more competitive rates and fees, especially for those with good credit. The Tangerine Money-Back Credit Card has no annual fee and offers an interest rate of 19.95% (slightly lower than many secured options).
Rewards and Perks
Unsecured cards generally offer more robust rewards programs. The Scotia Momentum Visa Infinite Card provides 4% cash back on grocery and recurring bill payments, 2% on gas and daily transit, and 1% on all other purchases. Many unsecured cards also offer travel insurance, purchase protection, and extended warranties.
Secured cards rarely offer rewards, focusing instead on credit-building features. However, some exceptions exist. The Neo Financial Secured Card offers up to 6% cash back at select partners and 1% cash back on all other purchases (proving that secured cards can sometimes compete in the rewards space).
Credit Limit Increases and Upgrades
Secured cards typically tie your credit limit to your deposit amount. Some issuers, like Capital One, may offer credit limit increases without additional deposits after a period of responsible use (usually 6-12 months).
Unsecured cards often provide more flexibility for credit limit increases. The BMO CashBack Mastercard offers automatic credit limit reviews, potentially increasing your limit without requiring a new application.
Upgrading from a secured to an unsecured card is a common goal for many users. Some issuers, like Capital One, have clear upgrade paths. After 12 months of responsible use, they may offer to refund your security deposit and transition you to an unsecured card.
Impact on Credit Scores
Both secured and unsecured cards can positively impact your credit score when used responsibly. The key factors are on-time payments and maintaining a low credit utilization ratio (ideally below 30%).
Secured cards can effectively build credit from scratch.
Unsecured cards, while also beneficial for credit scores, may have a more significant impact due to potentially higher credit limits. This can lead to lower overall credit utilization, which accounts for 30% of your FICO score calculation.
Final Thoughts
Your choice between a secured versus unsecured credit card depends on your financial situation and goals. Secured cards require a deposit and suit those with limited or poor credit history. Unsecured cards don’t need a deposit and offer better rewards, but have stricter approval requirements.
Consider your credit score, income, and financial objectives when deciding. Always pay your bills on time, keep your credit utilization low, and monitor your credit score regularly. These habits will help you build a strong credit profile and open doors to better financial opportunities.
At Financial Canadian, we understand the importance of making informed financial decisions. We offer comprehensive web design services to help businesses establish a strong online presence. A well-designed website can be a powerful tool for sharing financial information (much like how the right credit card can be a valuable asset in your financial toolkit).
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