A good credit score is a great asset to have these days. It comes in handy in all those situations when you need credit to buy anything that cannot be paid for immediately, like a home, vehicle or loans to tide over emergencies/unplanned circumstances or even for availing a credit card.
As it is understood, a bad credit score often closes options for you to get credit. Even if you manage to get the credit you want, it will be on a high rate of interest, reduced amount or shorter tenure. This would mean a bigger hole in your pocket. A bad credit score does not have overnight fixes, so it takes time to turn a bad score into a good one.
This is also a problem that many people who enter the workforce face. They might have never applied for credit, so they do not have a credit score. Having a credit score and availing credit is like the chicken and egg story: without credit score you will find it very difficult to get a credit and without credit, you cannot have your credit score.
So, building a credit score becomes essential as you move ahead in your career and look to own bigger assets like homes or vehicles. Among the many other options that can help you in building your credit score, getting a secured credit card is one of the better ones.
What Is A Secured Credit Card?
Generally, all credit cards are unsecured credit from the issuer's point of view. The only source of trust that the issuer has is good credit score and income documents of the borrower. Therefore, it is next to impossible to get an unsecured credit card with a bad credit score. In this case, a secured credit card can be of good help.
A secured credit card is a recent entry into the financial markets. This means that a borrower can be eligible for a credit card against some security.
Most of the times it is a fixed deposit. The credit limit of these cards is rationed against the amount in the fixed deposit, often limiting up to 75 - 85%. This card is made available to the individuals with a low credit score as well, as the issuer always holds the guarantee of a fixed deposit.
A Secured credit card otherwise functions like a normal credit card, when it comes to repayment, minimum amount due and interest charges on the unpaid amount. On the other hand, the fixed deposit continues to earn interest at the specified rate. In the event of a default on the credit card, the amount held in the FD is liquidated to the extent of default.
Individuals who can make use of secured credit cards are:
Those with low credit score
Those who are self-employed or who do not have a fixed stream of income
Those who are unemployed
Those individuals with low income or are working in companies that feature in the blacklist of credit card companies.
There are many advantages of going in for a secured credit card. Some of them being:
Helps you improve your credit score: For all those struggling with a low credit score, going in for a secured credit card makes sense. Once you get a card, be regular with your repayments. This would show you as a creditworthy person and help build a credit score. When you go in for a secured credit card, keep tracking if the repayments have reflected on your credit score. You can check your latest credit score regularly here for absolutely free of cost and keep track of your repayments.
Additional Reading: Tracking your credit behavior is now simple
Low Documentation: As the secured credit cards are issued against a fixed deposit, the need for documentation is less when compared to a normal credit card. The proof of income, IT returns, employment certificate and the other documents that are normally required for availing credit are done away here, as you have a fixed deposit as security.
Your FD Earns Interest: Your fixed deposit remains untouched and earns interest at the specified rate as long as your repayments on the credit card are regular. So, while your money earns interest, you can get a credit card. Just by ensuring that you make regular repayments, you can avail triple benefits of utilizing a card, earning interest on your FD and also bettering your credit score.
Useful for those with no credit score: Secured credit cards are especially helpful for individuals who are just starting their careers, students, etc. As they are yet to open their credit history, getting an unsecured credit card may be out of the question. But a secured credit card comes to their rescue and also helps build their credit history.
Using a secured credit card may be a great way to kick-start a lifelong journey of being responsible towards credit. When you are able to be responsible towards credit by using a secured credit card, you would be able to move towards other forms of credit like loans and unsecured (normal) credit cards easily. Getting a secured credit card should not be your major concern, however maintaining regularity in repayments is what matters and helps you improve or build your credit score.