When you hear the term credit card, you usually think of the 'unsecured' category of cards, which require no collateral. However, there is also a category of 'secured' credit cards on the market that are issued in exchange for set deposits.
While standard credit cards provide a convenient means of managing financial transactions, they typically come with strict eligibility requirements, including a good credit score. However, maintaining a credit score above 750 can prove challenging for many individuals. This is where secured credit cards come to prove beneficial to you.
Secured credit cards provide a convenient and accessible option for individuals with no credit history or a low credit score to obtain a credit card. The unique feature of this card type is that it requires a deposit to be provided as collateral. So, as a first-time card user, obtaining a secured credit card is simple.
This article will discuss how secured credit cards work, how they can benefit you, and their eligibility criteria. But first, let's understand what secured credit cards are.
What Is a Secured Credit Card?
A secured credit card is similar to a traditional one, except the secured one is backed by a payment that serves as collateral.
A secured credit is issued to individuals who need a credit card but have a limited credit history. Banks offer these secured credit cards to their customers to assist them in building their credit histories.
Additionally, you can only get a credit card once you pay a certain amount to the lender, which usually serves as the card's credit limit.
Eligibility of Secured Credit Cards
Each credit card issuer has its set of eligibility requirements when it comes to a secured credit card.
While some banks may require you to deposit a minimum amount for the card, others require you to open a fixed deposit. The fixed deposit amount serves as collateral if you cannot pay your dues.
How a Secured Credit Card Works
Secured credit cards are there for consumers who, owing to their poor credit scores, irregular income stream, and credit history, cannot obtain traditional credit cards. The most significant aspect of a secured credit card is that you can only get one against a fixed deposit.
To acquire a secured card, you must have FD, which works as collateral, in the same financial institution from which you want the secured card. Typically, the bank allows customers to obtain a secure credit card with a credit limit of around 85% of their deposit. Also, since this card works on the collateral of the fixed deposit scheme, you must have the FD all the while you are using the card.
You must, however, remember that the lender has complete authority to liquidate the deposited money to recover any outstanding or unpaid amounts that you may have on the secured card. So, you must ensure that you don't miss any repayments.
Besides that, these cards function similarly to traditional credit cards. But they have an added advantage as the cardholder can receive interest on their deposits with the financial institution.
Advantages of Secured Credit Cards
#1. Suitable for Applicants with No or Low Credit History
If you worry that you might not get a credit card due to a less-than-ideal credit history, then you should worry no more!
You can simply start your credit score journey using a secured credit card. This is because secured credit cards do not require their customers to have a credit history or a credit score.
The only criterion for getting a secured credit card is having a specified amount of money in an FD with the financial institution you wish to get the card.
#2. It Facilitates Your Credit History and Credit Score
With a secured card, you can build a credit history (over 6-8 months). You can do this by making purchases and paying with a secured card.
Additionally, your credit score inevitably increases with each successful, on-time repayment. Another way to improve your credit score is by consistently keeping your credit usage ratio for the secured credit card below 30%.
#3. It Provides Interest on Your FD
Even though your fixed deposit has been placed as collateral for a secured credit card, you keep getting interest on it. It's because the bank only acquires ownership of the FD if the customer fails to pay the outstanding dues.
So, as long as you use the secured credit card and pay back your bills on time, your FD will remain intact, and you will receive interest on it. This will create an extra stream of income for you while you reap the benefits of a credit card.
#3. Convenient Usage
You can use a secured card for ordinary purchases like a regular credit card. The majority of offline establishments as well as online stores, accept these cards.
Some cards have EMI advantages, gift certificates, and purchase features. You can take advantage of it by contacting your credit card provider.
#4. Hassle-Free Application Process
The application process for a standard credit card might be time-consuming. You must first meet the card issuer's eligibility requirements and submit an application form along with accompanying papers. Banks may take a few days to process all of this.
But on the other hand, a secured credit card has a much simpler application process. You don't have to submit any papers or meet any complicated eligibility conditions because you already have a fixed deposit with the bank. Instead, you simply need to fill out an application form to obtain the card.
Wrapping Up
While secured credit cards benefit individuals with low credit scores, it's important to consider their limitations. For example, you need a minimum amount to open an FD to be eligible for a secured credit card. The credit limit on these cards is based on the amount you deposit in the FD. So, if you deposit a smaller amount, your spending limit on the card will be lower.
Not to mention there's a lack of diverse choices, offers and fewer discounts on a secured credit card compared to regular credit cards. But, if you opt for an unsecured credit card, you can earn reward points, enjoy cashback benefits, and receive discount vouchers.
If you're looking for a credit that offers all these benefits, turn to Tata Capital. We provide a variety of credit card options for you to choose from.
So don't wait anymore. Choose a credit card that best suits your requirements and enjoy the privileges that come with it. Apply today!
07 June 2023
6 mins read
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