What is a secured card and how will it help improve my score?
Unlike a regular credit card, banks issue asecured card against the security of a fixed depositplaced by you. In effect, your credit limit is a percentage of the money you have deposited.For example, if you deposit Rs.30,000/- in the bank and they give you 80% of the deposit value as a limit, then the credit limit on your card is Rs.24,000/-. You can use this like a regular credit card. In case you default on payments, the bank will take the funds from your security deposit and your credit score will suffer.
The minimum deposit for a secured card is Rs.20,000/-, though this varies by bank. Most banks will pay interest on your deposit. Many charge an annual fee though some may waive other user fees.
How does using a secured card help your credit history?
A secured card is ideal for two types of people:
- If you do not have any/sufficient credit history. Banks will be wary about lending to you if they do not have any record of your repayment behavior. However, they might offer you a secured card against your fixed deposit since they run no credit risk at all. Once you establish a good credit history with this card, you can apply for a regular credit card.
-If you have a poor credit history and wish to repair it.
The big difference between a secured card and a debit card is that your activity on the secured card is reported to the credit agencies. This means that even if you use a debit card responsibly, it does not impact your score since your usage is not reported.However, if you demonstrate excellent credit behaviour on a secured card, your activity will be recorded by the credit bureaus.
By using less than 50% of your limit (showing you are not desperate for credit) and paying on time, your credit scorewill automatically improve.
CreditMantri can guide you through evaluating all the offers in the market and help you decide what is best suited for your credit situation.