How to build credit with a secured card

A low credit score can be the result of many different situations, not just poor financial decisions or habits. For example, you might have been a co-signer on a loan which defaulted. You might have gone through financial difficulties due to job loss or divorce. Or you might simply be a newcomer to Canada starting with zero credit, needing to build it from scratch. Whatever your reason for a low credit score, you may have been told that a secured card is a good option to build your credit score. It’s true, a secured card can be an effective way to establish a positive credit history, but how quickly depends on each individual situation. For some, a secured card can help build their credit score in as little as six months, whereas for others, it could take longer.

How to build credit with a secured card

A secured card is like a regular credit card, however first you must put down a security deposit that is, in most cases, equal to the limit you would like on your card. For example, if you would like a card with a $500 limit, you put a $500 deposit down to secure the card. Secured cards are low risk to lenders so there is often no credit check needed.

There is sometimes confusion between pre-paid cards and secured cards. The biggest difference is that a pre-paid card does not report to the credit bureaus. It’s true, you won’t pay interest on a pre-paid card, but it won’t help to increase your credit score either.

If you take out a secured card, there are two important factors to remember that will have the biggest impact on your credit score:

• How to build credit with a secured card #1: You must pay at least your minimum payment every month, just like any other credit card. It’s this good payment behaviour that is reported to the credit bureaus every month.
• How to build credit with a secured card #2: You should only use a small portion of your available credit (under 30% if possible). Your credit utilization rate accounts for a large portion of your credit score.

Who is a secured card suitable for?

• People with a poor credit score – as mentioned above, a secured card reports to the credit bureaus so will slowly increase your credit score, even if you are starting out with a low score and can’t get approved for a traditional credit card.
• People with no credit history – someone who has no credit will benefit more quickly from a secured card, because there is no negative information on their credit report. A secured card provides the all-important positive information, so in as little as six months someone who is just building credit could qualify for an unsecured credit card.
• People wanting the flexibility of a credit card, but without the risk of debt – there are other people who have a decent credit score, however, they want to either build their score even more, or just want to have the option to shop online, but they do not want the temptation of credit that could get them into trouble with debt.

How fast can a secured card build my credit score?

Ultimately, it depends on a few factors:

• Where you are starting from (your current credit score)
• Where you want to be (your ideal credit score)
• Other credit accounts you have open (any loans, lines of credit etc.)
• Your financial habits (do you make your repayments on time and pay more than the minimum payment?).

If you get a secured card – and keep it in great standing – you will almost certainly improve your credit score. However, it is critical to note that it’s not just your secured card that you must make all your repayments on; every source of credit you have, from car loans, cash loans, and mortgages, to lines of credit, and other credit cards, must be kept in good standing. Good financial behaviour on one card, and poor financial behaviour on another card will simply cancel each other out and your score will not increase.

Refresh Financial offers a secured card with deposits starting as low as $200. You can apply online in less than 20 minutes!