Not only do secured and unsecured credit cards look the same, but they also function in a very similar way, so it can be difficult to tell the difference. Whether you’re looking to access more credit, or you want to re-evaluate how you use your current credit, understanding the differences between a secured and unsecured credit card can help you determine which one may be the best fit for you.

What Is A Secured Card?

Unlike regular credit cards, secured cards typically require a refundable deposit upfront before you get approved. Since you can apply for a secured card with bad or no credit, the deposit acts as collateral for the bank, as they hold it aside to cover your purchases in case you stop making payments. The amount of the deposit that’s required upfront is typically the credit limit on the card, which tends to range from $200 – $2,000. Once you make this deposit, you can start using your card like you would any other credit card, but if you want more spending power, you’ll have to deposit more money. You’ll incur interest if you carry a balance from month to month, so if this is the card you’re leaning toward, make sure you prioritize paying your balance in full and on time each month to keep your credit in good standing.

You’ll also likely encounter an annual fee and potentially even application processing and monthly maintenance fees. This is all in addition to the regular penalty and transaction fees that regular credit cards may charge.

What Is An Unsecured Card?

When most people refer to credit cards, they’re talking about unsecured cards. These cards don’t require any kind of security deposit to be paid before they can be used. Unsecured credit cards come with lower fees, lower interest rates and the added bonus of perks like rewards, travel incentives or even cash-back options. You can also be approved for a much higher credit limit, which helps you keep your credit utilization ratio in check. These cards are available for applicants who have good to excellent credit and a solid credit history.

Difference Between Secured And Unsecured

While both cards function in the same way, they offer different advantages and disadvantages, so it’s important to understand the difference between them:

Application Approval

Applying for an unsecured card means your financial institution will perform a hard credit check to make sure you qualify based on a number of factors, including your credit score. The result of these findings determines not only whether or not you’re approved, but also your credit limit and interest rate. Secured cards have no credit score requirements, and some institutions won’t even perform a credit check at all.

Fees And APRs

While APRs (annual percentage rates) can vary greatly between cards, typically unsecured cards offer lower options. The higher APRs you’ll find with secured cards act as collateral for the bank, just as the upfront deposit. If you qualify for a secured card, it’s guaranteed that you’ll have a higher interest rate than the average unsecured card holder. Secured cards often have blanket APRs for all applicants where unsecured cards offer variable interest rates based on how good your individual credit is.

Your overall credit limit with a secured card is typically maxed out at around $2,500, and in order to access that credit, you need to pay for it in cash upfront. Unsecured cards assign credit limits based on overall creditworthiness so applicants can end up with access to thousands of dollars more than they’d ever need on a monthly basis.

When it comes to monthly maintenance fees, any unsecured cards that charge these often make it easy to offset instantly with rewards or cash-back. Secured cards, on the other hand, will tack on these extra fees that will show up as charges on your account, which means they can incur interest and reduce your available credit so you’ll need to pay them off as quickly as possible like you would any other charge.

Credit Reporting

Unsecured credit card issuers regularly report your credit activity to one or more of the two main credit bureaus in Canada; Equifax, and TransUnion. Secured card issuers don’t always do the same so if you’re thinking about applying for a secured card to help create or build credit, you’ll want to make sure you ask for an account that reports details to the credit bureaus.

Building Credit

If you don’t qualify for an unsecured card at this moment and have the ability to wait, consider what you can do to build up your credit in the meantime so that you can apply for an unsecured card instead and avoid encountering extra fees and deposits to access very limited credit.

To put it simply, your credit score is a three-digit number that’s calculated by the credit bureaus in Canada. This score ranges from 300 – 900 and is an indication of how creditworthy you are, or basically, how likely it is that you’ll be able to pay banks and other financial institutions back.

Your credit score takes these six factors into account:
1. Credit Inquiries 10%

2. Credit History 15%

3. Credit Utilization 30%

4. Payment History 35%

5. Credit Mix 10%

6. And takes into account any instance of being sent to collections or filing for bankruptcy

Understanding what your credit score is and how it’s calculated will help you better understand how to improve it and use it to access better rates. Those three digits could help you determine the interest rate you’ll receive when you apply for a credit card, loan or mortgage, so understanding what your score is and where you land on the scale, will help you get a better grasp of what you can do to improve.

If you’re looking to build up or improve your credit, there are a few steps you can take:

Avoid Applying For Too Much New Credit
Credit inquiries account for 10% of your overall credit score, so don’t mindlessly open new credit accounts for the sake of earning more rewards at a local store or unlocking better prices per litre at the gas station. Constantly applying for new credit can come off as a red flag for lenders, who may see you as an irresponsible borrower that’s likely a higher risk.

Consolidate Your Debt
If you can, consider consolidating your debt to avoid making multiple payments every month at different interest rates. This can save you money in the short and long term and help make your finances easier to manage if you’re working to pay back old debt.

Pay Down Your Debt

Got debt to crush? Most of us do. Start by making payments on past-due accounts right away. Getting current with anything that hasn’t yet gone to collections is a solid first step. Accounts that are moved to collections will remain on your credit report for 6 years, so avoiding that whole process is advisable. If you have multiple sources of debt, experts suggest paying off the debts with the highest interest rates first, regardless of their balance.

Reduce Amount Of Hard Hits On Credit Applications

Occasionally you’re going to apply for more credit, in one form or another, and that’s totally fine. Just make sure you keep these applications to a minimum, so when lenders check your credit report, they don’t see red flags of a borrower who may be living beyond their means or urgently in need of more money. To keep this in check, be sure to limit the amount of times you apply for credit and apply only when you really need it. It’s also important to note that any checks that come through within a 2-week timeframe will be counted as one hard hit, so when you’re shopping around for better rates on a credit card, car loan or mortgage, be sure to cluster all your appointments so your credit score doesn’t take an unnecessary hit when you’re about to need it most.

Understand The Difference Between Hard Checks Vs. Soft Checks

On that topic, it’s important to understand the difference between different types of credit checks when you’re applying for new credit, as they both have different impacts on your credit score. Hard checks appear on your credit report and will count towards your credit score. These types of checks can include applications for new unsecured credit cards and some rental/employment applications. Any lender who does a hard check on your credit report will see all of these previous inquiries.

Soft checks appear on your credit report, but they don’t affect your credit score, as they’re only visible to you. Some examples of soft checks include the action of you requesting to see your personal credit report or businesses asking for your credit report to update their records for an existing account you have with them.

Choosing Between A Secure And Unsecured Card

A secured credit card may be the right fit if you have bad credit or need to build up your credit history to qualify for other credit products in the future. If you’re trying to get back on your feet after a financial downturn, these cards have few approval qualifications, unlike unsecured cards which will require a hard credit check.
There are many more options when it comes to unsecured cards. If you have good and established credit, you can take your pick of cards that will offer you lower interest rates, fewer fees and often rewards or cash back options for frequent purchases. You can also expect a much higher credit limit with unsecured cards, and as a result, your credit utilization ratio will typically be lower (ideal is under 30%), which means you won’t have to worry about impacting your credit score by carrying a modest balance every month.

We all have unique financial situations so what works best for one person, may not be well suited for you. When comparing your credit card options, it’s important to consider which cards you qualify for and then narrow down your options from there. Both secured and unsecured cards have their advantages and disadvantages and choosing one to suit your current needs, doesn’t mean that’s your only choice forever. Looking to speak with a professional about your financial situation or credit options? Get in touch with our team today!