Secured credit cards offer a practical solution for individuals aiming to build or repair their credit scores. With disciplined use and timely payments, these cards can help improve creditworthiness and open doors to additional financial products.
What is a Secured Credit Card?
A secured credit card is backed by a fixed deposit (FD) held with the issuing bank. The credit limit is typically a percentage of the FD amount, usually ranging from 80% to 100%. This arrangement minimizes the bank’s risk, making secured cards accessible to those with poor or no credit history.
Benefits of Secured Credit Cards
- Credit Score Improvement: Regular usage and timely payments can enhance your credit score over time.
- Easier Approval: These cards are easier to obtain, even for individuals with poor credit scores.
- Interest Earnings on FD: The fixed deposit continues to earn interest while serving as collateral.
- Controlled Spending: The credit limit linked to the FD prevents overspending.
- Access to Credit Facilities: Secured credit cards offer a way to access credit without requiring a high credit score.
Secured vs. Unsecured Credit Cards
| Feature | Secured Credit Card | Unsecured Credit Card |
|---|---|---|
| Approval Criteria | Requires a fixed deposit (FD) | Based on income and credit score |
| Credit Limit | Linked to the FD amount | Based on income and credit history |
| Interest on Deposit | Yes, FD earns interest | Not applicable |
| Income Proof | Not required | Required |
| Credit Score Requirement | Low or no credit score needed | Good credit score required |
| Global Acceptance | Yes | Yes |
| Rewards and Benefits | Similar to regular credit cards | Often better rewards and benefits |
| Upgrade Option | Can be upgraded to an unsecured card | Not applicable |
| Risk for Bank | Low (secured by FD) | Higher (unsecured) |
Important Considerations
- Timely Payments: Paying your dues on time is crucial to building or repairing your credit score.
- Monitor Credit Utilization: Keeping your credit utilization low positively impacts your credit score.
- Fees and Charges: Be aware of annual fees, late payment charges, and other associated costs.
Expert Opinion
Adhil Shetty, CEO of Bankbazaar.com, notes, “Secured credit cards are a valuable tool for improving a poor credit score. However, unsecured credit cards offer a broader range of benefits, such as rewards programs, cashback offers, dining discounts, and travel perks. To maximize these benefits, compare different credit card options and choose one that aligns with your lifestyle and spending habits. Regardless of the card type, timely payment of dues is essential to maintain good financial health.”
By responsibly managing a secured credit card, you can establish a solid credit history and eventually qualify for unsecured credit cards and other financial products.