At Milesopedia, we will be the first to tell you of the amazing benefits of owning a credit card. Flights, Hotels, and more can be earned through strategic and diligent spending. We also stress the importance of making sure you practice safe credit card habits to prevent negatively impacting your credit. Credit cards can be tricky, and many people may feel in the dark about these great options because of their past mistakes.

Getting approved can be tough if you have a bad or no credit history. That is where the security deposit comes in. In this article, we will show you how a security deposit can eventually open up your pathway to establish, build or rebuild your credit and enjoy what is out there.

A security deposit is a refundable amount of money held by a credit card issuer that acts as collateral for a secured credit card. Even if you have a bad or no credit history, the lender is assured and protected with this security deposit if you stop making payments. This is similar to a renter giving a security deposit before signing a lease with a landlord.

Security deposits also act as your credit limit. Knowing this, you should be very mindful of the amount of money you use as your security deposit, as any late or missed payments will incur additional interest and, most importantly, hurt your chances of building strong payment history.

When it comes to credit cards, the name of the game is financial risk. Lenders assess you based on your ability to make consistent payments on time. At first glance, both unsecured and secured credit cards appear to function the same. You can use them for purchases, you are charged interest if you hold a balance at the end of the month and you receive a statement. Despite that, there are some differences that set them apart. 

For starters, an unsecured credit card does not require a security deposit to establish. The credit card issuer, in this case, assesses the applicant based on a number of criteria including their credit history and determines whether or not to approve them for a card or an increased credit limit. 

In addition, the credit limits for the two cards can be different. You may be eligible for a higher credit limit with an unsecured card as well as more options when it comes to rewards. With secured credit cards, the amounts may vary and a credit card issuer may give you a specific range to follow.

As you go through the application process for a secured credit card, you will find that each credit card company has its own processes and requirements. The application is usually online and will ask you to provide personal information like your bank account information and monthly income. From there, you can choose your desired credit limit and make the deposit. Oftentimes, you will make your security deposit on the same day that you complete your application. In some cases, the credit card issuer will allow you to provide your deposit after you have been approved. It is incredibly important that you have enough money come withdrawal time to ensure that your application does not get declined.

For starters, an unsecured credit card does not require a security deposit to establish. The credit card issuer, in this case, assesses the applicant based on a number of criteria including their credit history and determines whether or not to approve them for a card or an increased credit limit. 

In addition, the credit limits for the two cards can be different. You may be eligible for a higher credit limit with an unsecured card as well as more options when it comes to rewards. With secured credit cards, the amounts may vary and a credit card issuer may give you a specific range to follow.

While this is a rather personal question and highly dependent on your current situation, here are some things to consider:

1. According to Equifax Canada, your payment history makes up roughly 35% of your overall credit score. That is massive! With a secured credit card, the point is to show good behaviour which means, paying your card on time and in full. If you have a credit limit above what you can reasonably afford, this will hurt your chances of establishing, building or rebuilding your credit. 
2. Another consideration is your credit limit’s impact on your credit utilization rate. This looks at how much credit you are using compared to your overall limit. A good rate is anywhere below 30%.  A larger deposit may give you a better utilization rate, but the tradeoff is poor spending, as a larger limit gives us the false sense of more money. 

Your credit card issuer will provide a minimum and maximum deposit amount. Suppose you think a large limit will hurt you rather than help you. In that case, you can consider placing the minimum amount and gradually increasing it as you show the ability to make consistent payments over time.

Who currently has some great secured credit cards in Canada? Here are our top 3 picks based on the minimum security deposit, flexibility, and fees.

1. Home Trust Secured Visa Card

Minimum security deposit: $500

Annual fee: 0$

Great for: Newcomers to Canada

The Home Trust Secured Visa Card is the perfect no annual fee secured credit card to help you build your credit up. Ideal for newcomers to Canada with no established credit history, the card comes with a minimum security deposit of $500 and a maximum of $10,000. The card is very standard, not offering much in terms of rewards and holding an interest rate of 19.99%. You could opt for a lower interest rate of 14.90% but that would come at an annual fee of $59. 

If you want to learn more about this card, visit the Home trust website for a detailed breakdown!

1. Plastk Secured Visa Rewards Card

Minimum security deposit: $300

Annual fee: $48

Great for: Rewards earners

Secured credit cards don’t have to be boring. With the Plastk Secured Visa Rewards Card, you can earn 1$ for every 250 points you receive. In addition, All new cardholders receive 5,000 bonus rewards points (a value of $20 (CDN) after 3 months. These rewards points can be used for gift cards, hotel & travel and even can be rewarded to Charity. At an interest rate of 17.99%, the downsides include a $6 maintenance fee and an increased interest rate of 29.99% after two missed payments (ouch). 

1. Neo Financial Secured Mastercard

Minimum security deposit: $50

Annual fee: $0

Great for: Rewards earners and credit building

No annual fee? Check. Cash back opportunities? Check. Low minimum security deposit and credit building ? Check, check. The Neo Financial Secured Mastercard has it all. This card makes it easy for people to access credit regardless of their credit history with its attractive features. Most impressive of all is an average 5% cashback with Neo partners. On top of that, the card makes an effort to help you through their all-in-one app, to track your spending, auto-pay and flexibility on your credit limits.   The trade-off is higher interest rates, coming in at around 19.99%-26.99%. This rate will depend on your application, credit profile and province. Regardless, this is a great card for anyone looking secured credit card in Canada.

The secure credit card deposit is refundable. You will typically receive your money back once you have paid your balance and closed your account or when your secured credit card is converted into an unsecured credit card. For the second option, you should verify to see if your credit card issuer offers this. If this option is available, you may wish to keep the card rather than cancel it as credit history is a component that is considered in calculating your credit score.

A secured credit card is an excellent option to establish, build or rebuild your credit. To improve your credit as quickly as possible, you should consistently do the following: 

• Pay your bill on time and in full, preferably
• Keep your credit utilization rate low
• Routinely check your credit score
• Spend only what you can afford to pay

The length it takes to build your credit varies based on your situation, but you can rest assured that these habits will help you along your credit journey. Will you be placing a security deposit anytime soon?