What is a Secured Credit Card, the Benefits, and Who can Avail It?
A Secured Card is just like any other credit card, except the basis on which they get issued (i.e., pledge of liquid security- Fixed Deposit). You can pay your bills, shop, book airline/railway tickets, etc., just like traditional credit cards, and pay the credit card bill on a monthly basis based on your billing cycle. If one does not file ITRs (Income Tax Returns), then a secured credit card is the best option for this.
- A secured credit card is issued based on liquid security (Fixed Deposit Account) taken as collateral to issue the card in favor of the applicant.
- A secured credit card has higher chances of approval as it is backed by liquid security.
- Credit Cards are generally offered by the issuing bank taking into consideration the repayment capacity of the applicant (through assessment of the present income).
- But if someone has past dues in the CIBIL report or something else adverse in the credit report, a credit card is generally not issued.
- In this case, one can apply for a secured credit card that does not require any sort of repayment capacity to be assessed.
In this post, we will discuss the concept behind Secured Credit Cards, features, the difference between a Secured Credit Card and an Unsecured Credit Card, how the card improves your credit score and frequently asked questions.
Concept Behind a Secured Credit Card
Credit cards have become a major component of our life. Carrying large cash is no more a hassle today. There are two types of credit cards, i.e., regular and secured. The normal cards are the ones where unsecured loans are available for the cardholders as they are unprotected by collateral. The secured credit cards are offered against assets, usually fixed deposits or any other savings. Non-payment of any dues can lead to the forfeit of the asset to the lender.
Here is what you must understand:
- One can apply for a secured credit card with a limit equal to the value of liquid security and the bank usually sanctions the same with no conditions.
- A lender who might have refused your traditional credit card request due to a weak CIBIL score or absence of credit history may not have any problem in granting a secured credit card, because these are backed by liquid security making the card risk-free to the lender.
- The lender can liquidate the liquid security if the credit card dues are not paid on time and hence the liquid security acts as insurance to the lender.
Features of Secured Credit Cards
- Acceptance: Secured Credit Cards are accepted in all places where unsecured credit cards are accepted. You can make purchases, pay bills, and book tickets in line with unsecured credit cards.
- Rate of Interest: However secured credit cards are backed by liquid security making the cards more secure to the lender, but the rate of interest on such cards is higher than the traditional credit cards. The reason behind the higher rate of interest is that these cards are issued to individuals with lower credit scores and such individuals are ideally charged a higher rate of interest for all kinds of loans.
- Add-on Benefits: A secured credit card functions like unsecured credit cards but the same may not be applicable for add-on benefits as the rewards are issued to the customers based on their creditworthiness.
- Boosts CIBIL Score: One can use these cards to better his/ her credit score as after getting a secured credit card issued based on liquid security, timely payments can be made to the lender which shall ultimately help in improving the credit score. A better score may help the customer to avail of other credit facilities from the lenders.
Differences Between Unsecured and Secured Credit Cards
Here are more details:
- Unlike traditional credit cards, secured credit cards require liquid security to secure the credit card.
- While traditional credit cards are issued based on present income and repayment capacity, secured credit cards just require liquid security to back the account/ card.
- A secured credit card may be used as a tool to boost your credit score, as it is usually availed by individuals with a low credit score. The traditional credit card has no such usage.
- The limit of unsecured credit cards depends upon the present income; on the other hand, the limit of a secured credit card depends upon the value of liquid security furnished.
- Unlike secured credit cards, traditional cards pose a higher credit risk to the issuer as they are not backed by liquid security.
- Assessment/ processing of secured credit cards is easier than traditional credit cards.
How Can a Secured Credit Card Improve Your Credit Score?
Making timely payments helps increase your credit score. This is because of timely payments. The same constitutes up to 35% of the credit score. By getting a secured card issued in your name and repaying the dues on time, your credit score improves. Another important aspect in a Credit Report is the Credit Utilization Ratio (CUR) which constitutes up to 30% of the credit score.
After getting a secured credit card of a high amount issued in your name, you should try utilizing the credit limit to a maximum of 30% which shall help you build a better credit score. Here, it is important to note that a higher limit in your secured credit card will be helpful because it shall be easy to use less than 30% of Rs. 1 lakh than only Rs. 10 thousand.
In case you can do nothing about the limit, you should try to settle the bills as and when the transaction is made without waiting for the due date. This will help keep your CUR low.
How to Get a Secured Credit Card?
Just like in the case of traditional credit cards, you need to submit an application to the bank for availing of a secured credit card. The bank shall then make a credit analysis based on the documents submitted by you. The bank will open an FD account in your name which shall be kept as security for your credit card. After this, a fresh credit card shall be issued in your name which shall work the same as the traditional credit cards.
Frequently Asked Questions about Secured Credit Cards
Here are the FAQs:
A secured credit card has a cash collateral deposit which is the credit line for the account. The primary criteria for a secured credit card are that this card is issued only against a fixed deposit at any bank or financial institution. This card is offered to people who cannot get a regular card but have an FD with some financial institution or bank.
The person enjoys an increased credit limit along with normal interest on FD. One does not have to pay extra to opt for this credit card. Except for a processing fee, there is hardly any charge applied by the user. In addition to these benefits, the user keeps earning regular interest on the FD account.
Here are the people who can opt for a secured credit card:
- Unemployed individuals
- People with a monthly income less than the minimum income requirement by the bank
- Low CIBIL score
- Working with a blacklisted company specified in the bank’s list
- An individual residing in a blacklisted area.
Here are the points to remember:
- The major feature of a secured credit card is to enhance the cardholder's CIBIL credit score and is hasty. Thus, make sure all the details regarding CIBIL are reported.
- Have complete knowledge about the fee the bank charges like the processing fee, annual fee, and much more. Choose an optimum bank after due research.
- Make sure the deal is such that the fixed deposit gets normal interest rates even when held as collateral.
These cards are secured since the bank has the right to liquidate fixed deposits to recover debts. The card holder gets no opportunity to close the FD account until he possesses the secured card. The banks usually offer 85% credit against fixed deposits. These cards are similar to regular credit cards. Users earn common interest on their fixed deposit even after using it as collateral.