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Secured Credit Cards

The average person's mailbox is bombarded with offers for new credit cards offering pre-approved credit cards with sky-high limits that are more than any of us should ever need.

But what about folks who have bad credit, or even no credit? For these people, getting approved for a credit card can be next to impossible.

That's where a secured credit card can come to the rescue.

How secured credit cards work

If you have a shaky credit history that you're trying to fix, or haven't got a credit history at all, lenders offer secured credit cards as a risk-free way for them to provide you with the opportunity to start building (or rebuilding) credit. You simply need to deposit money into a savings account, which in turn is used as collateral for a line of credit. The lender has a safety net in that collateral and you as the customer have the chance to create a favourable credit profile.

Be wary of the costs

The downside to this type of credit card can be the cost. Annual fees vary and are often up to $75 per year. Interest rates are typically higher than traditional credit cards too. But if you want to build or rebuild your credit history, a secured card can make sense.

After a certain period during which you've shown responsibility through making payments on time, some lenders will give you interest on the money you've had tied up as collateral.

Credit limits can also be increased and some programs even allow you to eventually 'graduate' to a regular credit card.

A newer offering that is appearing in Canada is the ability to draw against the equity in your home rather than put down a deposit.