What is a Secured Credit Card?

Starting your credit journey can feel overwhelming, but secured credit cards offer a safe, accessible way to build your financial foundation—even if you're starting from scratch.

Think of building credit like learning to ride a bike. You wouldn't start without training wheels, right? A secured credit card is like those training wheels for your financial life. It gives you the support you need while you learn the ropes.

If you're new to credit, recovering from past financial challenges, or simply want a safer way to establish your credit history, a secured credit card could be the perfect starting point.

What exactly is a secured credit card?

A secured credit card is a beginner-friendly credit card that requires you to put down a cash deposit upfront.

Here's how it works in simple terms:

The basics:

• You deposit money (usually $200-$500) when you open the account

• This deposit becomes your credit limit

• You use the card just like any other credit card

• Your deposit acts as a safety net for the bank

Think of it this way: If you put down a $300 deposit, you get a $300 credit limit. If you buy groceries for $50, you owe $50—just like with any credit card. The deposit only comes into play if you can't pay your bill.

The key difference from a debit card: Even though you put money down upfront, you're still borrowing money when you make purchases.

This means your payment history gets reported to credit bureaus, which helps build your credit score over time.

Secured vs. regular credit cards: What's the difference?

Let's break down the two main types of credit cards in simple terms:

Regular (Unsecured) Credit Cards

• No deposit required

• Bank takes on more risk

• Harder to qualify for

• Often better perks and lower interest rates

• Higher credit limits possible

Secured Credit Cards

• Require a cash deposit

• Less risk for the bank (thanks to your deposit)

• Easier to qualify for

• Designed for credit building

• Credit limit matches your deposit

Both types work the same way for daily use. You swipe, you owe money, you pay it back.

The main difference is that secured cards give you a chance to prove yourself when traditional cards might say "no."

When a secured credit card makes sense

A secured credit card could be perfect for you if:

You're building credit from scratch

Maybe you're young, new to Canada, or simply never needed credit before. Secured cards welcome beginners with open arms because your deposit reduces the bank's risk.

You're rebuilding after financial challenges

Life happens. If past financial difficulties have hurt your credit score, a secured card offers a fresh start to demonstrate responsible credit use.

You have the deposit money available

Since you'll need to put money down upfront (and leave it there while your account is open), make sure this won't strain your budget.

You want a stepping stone to better credit products

Many people use secured cards as a launching pad. After 6-12 months of responsible use, you might qualify for regular credit cards with better terms and rewards.

The potential downsides to consider

Like any financial product, secured credit cards aren't perfect.

Here's what to watch out for:

Higher costs

• Fees: Some cards charge annual fees, application fees, or monthly maintenance fees

• Interest rates: Often higher than regular credit cards (though this doesn't matter if you pay in full each month)

Lower credit limits

Since your limit equals your deposit, you might start with just $200-$500. This is fine for building credit but limits larger purchases.

Smart tip: Keep your spending under 30% of your limit. So if you have a $300 limit, try to keep your balance under $90 to optimize your credit score.

Cash tied up

Your deposit sits with the bank until you close the account or upgrade. Make sure you can afford to have this money unavailable.

How to succeed with a secured credit card

Follow these simple rules to maximize your success:

Use it regularly (but lightly)

• Make small purchases you can easily afford

• Aim to use 10-30% of your credit limit each month

• Don't let it sit unused—regular activity shows lenders you can manage credit

Pay on time, every time

• Set up automatic payments for at least the minimum amount

• Better yet, pay your full balance each month to avoid interest charges

• Even one late payment can hurt your credit score

Monitor your progress

• Check your credit score monthly (KOHO offers free credit score tracking on the Essential plan)

• Watch for your credit history to appear on your credit report (usually within 1-3 months)

Plan your graduation

• After 6-12 months of good payment history, ask about upgrading to an unsecured card

• Some banks will automatically review your account for an upgrade

Is a secured credit card right for your situation?

Consider a secured card if:

• You're starting your credit journey from zero

• You've been rejected for regular credit cards

• You want a low-risk way to rebuild your credit

• You have cash available for the deposit

Look elsewhere if:

• You already have good credit and qualify for better cards

• You can't afford to tie up money in a deposit

• You're not ready to commit to responsible credit card use

Remember: The goal isn't to keep a secured card forever. It's a stepping stone to better credit and more financial opportunities. With consistent, responsible use, most people can graduate to unsecured cards within 6-12 months.