Unlike a regular credit card, you need a cash deposit with the bank to be issued a secured credit card. This deposit is used by the bank as security in case you default on your credit card payments. This kind of card also helps you create credit history or rebuild your credit profile if you have a poor credit score.
When should you opt for a secured credit card?
There are three categories of people who benefit from this card:
1. If you have poor credit history and low credit score: If you want to rebuild your credit health or plan to apply for a loan, using a secured card is a good way to improve your credit score. Every payment you make on time and in full will be reported by the bank to the credit bureaus, and your credit score will improve quickly.
2. If you have little or no credit history: In order to become loan eligible, it is very important to have a sufficiently long credit history. If you have never taken a loan or have limited credit card exposure, you do not have enough of a credit history for banks to evaluate your credit worthiness. This lack of credit history might lead to rejection when you apply for a loan. A secured credit card is a relatively quick way to build your credit history and improve your credit score so that you are able to avail of loans in the future.
3. If your application for a regular ‘unsecured’ credit card has been rejected: Banks will not reject an application for a secured card since they have your deposit as a safeguard. If you have been rejected for a regular card because of poor or insufficient credit history, a secured card allows you access to credit and improve your credit score at the same time. Responsible usage of this card will allow you to upgrade to a regular credit card over time.
How does it work?
A secured credit card works exactly like a regular credit card. You need to pay your monthly credit card bill on time and in full. The only difference is that in case you do not make your payment, the bank will use your security deposit to recover their dues.
How does it help my credit score?
The bank reports every monthly payment you make to the credit bureaus. Each repayment will have an immediate positive impact on your credit score. So it is very important to make sure you make every payment on this card on time, and in full, so that it has the maximum positive impact on your score.
How is it different from a debit card?
In a debit card, your bank account is debited when you make a purchase. With a secured card, your account is not automatically debited. You need to make monthly payments when you receive your bill. If you default on a payment, only then will your bank use your security deposit to pay your credit card bill.
What is the credit limit?
Banks usually extend between 80-90% of your security deposit as your credit limit. For example, if you have deposited Rs. 1,00,000, your credit limit on that card will be between Rs.80,000 and Rs.90,000.