Credit cards not only save us from the hassle of carrying cash, they also reduce our cost of transactions by offering cashbacks, discounts and reward points on card transactions. Those with good repayment track record are also offered instant credit in the form of loan against credit card. However, not everybody is eligible for a credit card. While many applicants are rejected due to low credit score or insufficient income, a large number of creditworthy individuals cannot avail credit cards due to their residence in non-serviceable areas. To service these segments, banks have come out with secured credit cards.
What are secured credit cards?
Secured cards are issued against collateral in the form of Fixed Deposits (FD). These FDs are opened by the bank issuing your card. The FD is a collateral against the non-payment of your credit card dues. As these FDs are lien marked by the bank, you cannot close them until you surrender the secured credit card. Such FDs are also opened in auto-renewal mode to ensure their renewal after the maturity date. The approval of these cards do not depend on your credit score, monthly income and location.
Banks usually allow up to 80–90% of the FD’s amount as credit limit for your secured card while the cash withdrawal limit can be allowed up to 100% of limit. Like regular credit cards, secured cards too provide additional benefits like interest free period, fuel surcharge waiver, discounts, cash back offers, reward points, conversion of your outstanding bill or big-ticket transaction into EMIs, etc. Axis Bank, ICICI Bank, HDFC Bank, State Bank of India, Central Bank of India, DCB Bank and Kotak Mahindra Bank are some of the major banks that offer secured credit cards. Secured credit cards are best suitable for those who cannot avail regular credit card due to their residence in blacklisted or non-sourceable areas or due to other factors like insufficient income, low credit score, absence of credit history, unrated/under-rated employer, etc.
Advantages of secured credit card
Helps build your credit score: A good credit score can go a long way in ensuring a healthy financial life by improving your access to credit at lower rates in the future. The most effective way of building a good credit score is to use your credit card for regular transactions.
Timely repayments improve your credit score while late payments or defaults brings it down. Thus, while availing secured cards and using them for regular transactions help in building credit history, it improves scores of those suffering due to a low credit score. Using secured credit card also improves your asset mix, thereby further improving your credit score. Interest-free period: Secured credit cards too offer interest free period of up to 50 days. This period refers to the date of credit card transaction and due date by which its repayment has to be made.
Fixed deposit(s) used as collateral with the card-issuing bank continue to earn interest for you. Thus, availing a secured card is similar to availing a loan against fixed deposit or other securities, where your investments continue to earn for you while you leverage them as security for additional funds. With the provision of converting your card balance into EMIs and availing loan against credit cards, secured cards can ensure quick credit access at times of financial emergencies.
Secured credit cards are a good alternative for those failing to get a regular credit card. The eligibility conditions are relaxed, documentation is minimal and card approval is almost guaranteed. If used well, secured credit card can be a great vehicle for building your credit history or improving your credit score.
The writer is VP & head of payments products, Paisabazaar.com