Credit cards help you save a significant amount on your spends in the form of reward points, cashback or direct discount. Using credit cards, you can also make big-ticket purchases and pay for it in instalments over the period of a few months. However, not everyone qualifies for every credit card. To check your eligibility for a credit card, the first thing that card issuers check is your credit score. A good credit score, combined with a stable employment and regular income, might make you eligible for a number of credit cards. But what about those who are new to credit?
If you do not have a credit history, it may be difficult for you to get the credit card of your choice. While leading card issuers like HDFC and ICICI serve new-to-credit individuals, only basic credit cards may be offered to such applicants. However, if you are not eligible for any regular credit card, you can get a secured credit card to begin your credit journey. But how does a secured credit card work? Is it equally helpful in building a good credit profile? Let us find out.
What is a Secured Credit Card?
Secured credit cards are designed for individuals who want to start or rebuild their credit journey. These cards are offered against collateral, like a fixed deposit, which acts as a security deposit in case the cardholder defaults on credit card bill payment. The bank has the right to forfeit the fixed deposit if the cardholder fails to pay the credit card dues for several consecutive months.
The credit limit offered on secured credit cards depends on the amount of the fixed deposit. Some card issuers offer credit limit of up to 100% of the fixed deposit amount, while some implement restrictions on the same.
Just like unsecured credit cards, secured credit cards can also help you build or improve your credit score. By the frequent use of your credit card and consistent on-time payments, you can see gradual improvement in your credit score.
Some of the popular secured credit cards in India are IDFC FIRST Wow Credit Card, Axis Insta Easy Credit Card and Paisabazaar Step Up Credit Card.
How does a secured credit card differ from a regular credit card?
A secured credit card can be used in the same way as a regular card. You can swipe it at a POS terminal or make online payments. There are three ways how it differs from a regular card:
- Secured credit cards are offered against a collateral, usually a fixed deposit, unlike regular cards that are unsecured.
- The credit limit on secured cards is decided on the basis of your fixed deposit. Usually 80% to 100% of the fixed deposit is given as the credit limit. The credit limit on unsecured credit cards is decided on the basis of your income, the limit on existing cards and several other factors.
- Secured cards usually come with basic features such as reward points or cashback across all transactions and do not give additional benefits like lounge access, co-branded benefits, etc. Unsecured cards offer wide-ranging benefits across multiple categories depending on the card type. They offer better cashback, rewards or other benefits, which can enhance your overall savings.
How does a secured credit card help you build credit?
A secured credit card is helpful for those who are new to credit or who have a poor credit score due to bad credit decisions taken previously. In both these circumstances, the user may not be eligible for unsecured cards or even new loans. To start the credit journey or improve a poor credit score, secured credit card is the appropriate method.
Just like an unsecured card, the financial activities related to secured credit cards are also reported to the credit bureaus. When you regularly use your card and make bill payment in full and on time, it will have positive impact on your credit profile. With disciplined usage, you will see gradual improvement in your credit score.
Secured Vs. Unsecured Cards: Which one should you choose?
If you are new to credit, you might have an unsecured card offer from the bank with which you have a savings or salary account. At the same time, you can also open a fixed deposit and get a secured credit card against it. Now, you might be confused as to which one you should choose.
Since unsecured cards usually come with better features and do not require you to open a fixed deposit account, we would advise you to go for the unsecured card. However, you should also look for the features and benefits offered on the card to see whether it matches your spending habits and then make a choice.