Secured credit cards: Here are all the facts that you need to know
In India, even though cash remains to be the preferred option for payment, more and more individuals are gradually moving towards transactions through payment cards. Card payment has increased by 40% in terms of value and 44% in terms of volume between 2014-15 and 2018-19. Specifically, credit card transactions witnessed a sharp spike from Rs.20,765 in April to Rs.42,773 in June 2020.
These figures are reported from the various types of credit cards in circulation such as a travel credit card, shopping credit card, rewards credit card, and secured credit card, among others. Here, let’s take a better look at a secured credit card and explore the pros and cons that accompany them.
What have secured credit cards?
The primary requirement of a secured credit card is that a cash deposit has to be initially made, which would act as collateral. The purpose of this collateral is to cut down the risk of the card issuer. Contrast this with unsecured cards, wherein issuers do not require a deposit when issuing them.
In the case of a secured credit card, the limit is equal to the deposit amount or under the limit, ensuring that credit card providers assume additional protection from default.
Yet, even among secured cards, features vary and can differ as per the card provider or limit available. In certain instances, there is a graduation component wherein, after a certain time, cardholders may move on to unsecured credit cards, and their initial deposit is refunded.
Few things to check when availing of a secured credit card
Before opting for a secured credit card, few aspects should be kept in mind –
- Terms of graduation
One needs to know beforehand the period after which the secured card may eventually graduate to an unsecured or partially secured card. If the specified time of account review is known, the cardholder can make expenses and repayments accordingly.
- Reporting of credit
As you have to make an upfront deposit to avail of a secured credit card, it becomes all the more important to know the reporting of credit for all the payments made before credit card application. It is advisable to find out whether your card issuer reports to any of the prominent credit bureaus such as Equifax, Experian, or TransUnion.
- Fees involved
Since secured credit cards are unlikely to offer any points or rewards, and also the fact that a cash deposit has to be made, it is best to opt for such a card with a lower fee.
Nevertheless, some unsecured cards, such as the Bajaj Finserv RBL Bank SuperCard also come with minimal annual and joining fees.
The financial institution providing the card also extends pre-approved offers to applicants to facilitate the process of financing. It is available on several other financial products as well, such as personal loans and business loans. You can check your pre-approved offer by merely submitting your name and contact details.
What is the eligibility to avail of secured credit cards?
The following entities stand eligible to avail a secured credit card –
- Individuals having monthly income which amounts less than the minimum income required by the credit card company.
- Individuals who are unemployed.
- Individuals with a low CIBIL score.
Advantages of secured credit cards
Apart from hedging the risk of credit card companies, there are a host of benefits of a secured card –
If you have a poor credit history, a secured credit card can be one of the best ways to go about building the cardholder’s credit profile. Since financial institutions have the option of securing credit by way of fixed deposits and other collateral, if the cardholder performs genuinely over time, it would favorably impact his or her credit history. It is also one of the main reasons why you are smarter with a credit card in your pocket.
Further, financial institutions and credit card companies usually do not offer credit cards to individuals having a low CIBIL score. One can use this credit card to improve their credit score by paying the bills on time.
Understandably, a secured credit card is an effective instrument for the enhancement of the CIBIL score. However, before sending a credit card application, know about the annual fees, processing fees, etc.