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How do Secured and Unsecured Credit Cards Work?

The Borrowell Team

Jun 17, 2020 7 min read

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How Does A Secured Credit Card Work?

Most people are familiar with credit cards but what you might not be familiar with is the difference between unsecured and secured cards. If you’re having trouble getting approved with your credit rating or are just starting out, a secured card might be a great choice.

We’re here to explain the key differences so that you can make your best choice for your financial future. We’ll also share who should use each, which cards we recommend, and when you can move from a secured card to an unsecured card.

What is a Secured Credit Card?

A secured credit card is backed by a cash or security deposit from the card owner. How much money you’re required to put on the card is based on your unique credit profile and the card issuer’s requirements. Let’s say the credit limit you’re approved for is $1,000. You’ll give the lender a cheque for $1,000 as a security deposit and they in turn give you a card with $1,000 on it to spend. If you don’t make your payments, the lender will claim that security deposit against any outstanding charges. 

A secured credit card is different from a debit card or prepaid credit card as it helps you build your credit. This is because the issuer of the card usually reports to a credit bureau to provide details about your activity. This includes information such as your payment history and credit utilization (how much of your available credit you’re using each month). 

Consider it this way: when you pay for something with a debit card, you’re using your own money. When you pay for something with a secured credit card—even though you have paid upfront for the card—you're using the lender’s money and then repaying them. Think of your security deposit as being held in a bank vault, only accessed if you don’t repay the amount owing on your card.

Who Should Use a Secured Credit Card?

A secured credit card is a great option for those who need to build their credit and may not be able to access more traditional unsecured credit cards. If you’re working to re-establish your credit after an insolvency, if you’re new to Canada, or if you’re a young Canadian new to using credit, a secured credit card can help you build your credit history.

How can I use a secured card to improve my credit score?

The great thing about secured credit cards is the issuer of a card usually reports to a credit bureau to provide details about your credit activity. This includes information such as your payment history and credit utilization – how much of your available credit you’re using each month (try to keep it under 30%). 

Making your credit card payments on time and using your card responsibly can help you improve your credit. Then, eventually, you would be able to move to an unsecured credit card. Unsecured credit cards are generally something to work towards (again, when used responsibly) because you can earn rewards or cashback, depending on what your specific needs. 

Which Secured Credit Card is Best for Me?

The best card for you depends largely on your credit score. When you check your score for free with Borrowell, you’ll instantly see the best credit card options available to you given your score and goals and also your likelihood of approval.

If you have a low credit score or don't have any credit history at all, a great place to start is Refresh Financial's Secured Card. No credit check is required to get approved for Refresh's Secured Card, which is great for new immigrants to Canada or students looking to build their credit history. With this secured card, your credit limit could range between $200 and $10,000. When you make purchases with Refresh's Secured Card and repay your balance, Refresh will report your repayments monthly to both Equifax and TransUnion, which will help you build your credit history.

Another option for someone looking to build credit is the Capital One® Guaranteed Secured Mastercard®. Depending on your credit history, $75-$300 will be required as collateral, although your credit limit may be higher. If you decide to close your account, the security funds will be returned once the balance is paid in full. Your credit limit would range between $300 and $2,500 (depending on your credit history). Capital One reports your credit activities to the credit bureaus monthly which will help you build your credit.

What is an Unsecured Credit Card?

An unsecured credit card is a credit card that does not require a security deposit. This is what most Canadians think of when they think of credit cards. Since you’re not required to put up any kind of security deposit to apply for an unsecured credit card, applications are typically more in-depth and lenders require that you have a certain monthly income and a good credit score to apply. The bank or financial institution has nothing to fall back on if you don’t make your payments, so they want to ensure there is a high likelihood that they’ll be paid back. 

Unsecured credit cards also typically allow you to earn rewards, such as travel rewards or cashback and come with perks like traveller’s insurance or no foreign transaction fees. The cards you’ll qualify for will depend on your income, credit score, and credit history. Make sure you remain in good standing with your creditors by staying on top of your monthly payments and pay at least the minimum each month ( ideally the entire balance!).  

If you struggle to make on-time payments, you can check out Borrowell’s latest bill tracking feature, which sends reminders to your phone and helps you plan ahead by predicting your bills and monthly balances. 

Who Should Use an Unsecured Credit Card?

If you already have a good credit score an unsecured credit card is very likely your best choice. Unsecured credit cards are a great way to take advantage of rewards and perks that can enhance your lifestyle. For example, if you frequently travel or go to restaurants there will be cards that offer benefits for that kind of spending. Unsecured credit cards also often have lower interest rates than secured cards.

Used responsibly, a credit card is a good way to establish and maintain credit. Learn about how credit cards work in our Borrowing 101: Introduction to Credit Cards guide.

Which Unsecured Credit Card is Best for Me?

There is a huge variety of unsecured credit cards available to Canadians. To find ones that you are most likely to be approved for with perks that are best suited to your lifestyle, sign up to Borrowell for free or log in to your account you can see which cards you're likely to be approved for and be able to apply in just a few clicks.

With so many options, it’s important to think critically about your spending habits and the rewards you’d like to earn in order to find the card that’s best for you. As a starting point, we’ve rounded up the top credit cards to fit your needs

When Can I Switch from a Secured to Unsecured Credit Card?

If you use your secured credit card responsibly by paying it off each month (or at least making the minimum payments) and keep your credit utilization low (under roughly 30%), your credit score will improve over time and lenders will offer you an unsecured credit card.

Once your balance is paid off in full you’ll be able to close the account on your secured credit card and get your security deposit back. 

The Bottom Line

For those with poor credit or who are new to building credit in Canada, a secured credit card is a great way to build your credit with responsible use. For those who already have good credit, an unsecured credit card will allow you to take advantage of perks and benefits. 

Don’t know your credit score? Sign up with Borrowell to check your credit score for free. You’ll see all of the financial products available to you and your likelihood of approval and be able to apply in just a few clicks. You’ll also get weekly updates to your credit score, as well as ongoing, personalized tips on how to use and improve your credit!

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Borrowell is dedicated to making financial stability possible for everyone. With over 2 million members, the company offers free credit scores in Canada, education, weekly credit monitoring, credit building solutions, as well as digital tools like AI-powered credit coaching and personalized financial product recommendations. For more information, visit or download the mobile app for Android or iOS.