Secured credit cards are a type of credit card backed by a fixed deposit made by the cardholder. This deposit acts as collateral, meaning it protects the lender in case you are unable to pay off your balance. For example, when you deposit ₹20,000, you might receive a card with a spending limit of ₹18,000.
Secured credit cards are easier to obtain than unsecured credit cards. If you have a low credit score or no credit history at all, secured credit cards provide an easy way to build your credit. Secured credit cards often have lower fees and interest rates. You can also use these cards for emergencies, allowing you to manage unforeseen expenses without stressing your budget.
Secured credit cards are a good option for building credit and offer useful benefits. They are often a better choice for many people than unsecured cards. If you use them responsibly, you can improve your credit score.
Building Credit History
People consider a secured credit card to be one that helps build or improve credit history. Credit scores are necessary for future financial steps like applying for loans or mortgages. Secured credit cards report payment histories to credit bureaus, just like regular credit cards. By using the card responsibly, like making on-time payments and keeping balances low, you can gradually build a positive credit profile.
Easy Approval Process
Secured credit cards are easier to get than traditional credit cards, especially for those who might have a low credit score or no previous credit history. Since your cash deposit backs the card, lenders face less risk and are more willing to provide approval. This makes it an accessible option for students, new workers, or anyone looking to establish their credit score. For example, you are new to credit cards and have no credit score. You opted for an FD-based credit card, like the Utkarsh Small Finance Bank superCard Credit Card, by depositing just ₹2,000. You have a limit of ₹1,800, and you are able to start with your credit score.
Shift to Unsecured Credit Cards
Once you establish a good payment history with a secured credit card, you may qualify for an unsecured credit card. Many banks in India offer a transition option, where, after a certain period and with effective credit management, cardholders can upgrade to an unsecured card, often with better rewards and benefits.
Lower Fees and Interest Rates
There are some secured credit cards that come with a joining fee, which are often lower than those for unsecured cards. Secured cards generally offer lower interest rates. This can be beneficial if you ever carry a balance from month to month, as it helps minimize the cost of borrowing.
Helps with Emergency Expenses
Having a secured credit card can serve as an emergency fund for unexpected expenses. For instance, if you face a medical emergency or your car breaks down, a secured credit card can help cover immediate costs. This access to credit can be necessary in managing unforeseen events without disrupting your planned budget.
Fraud Protection
Using a secured credit card can be safer than carrying cash. In case of loss or theft, most credit cards come with built-in fraud protection, which can minimize your liability. Secured cards provide similar protections, keeping your financial information secure. If any fraudulent transactions occur, you can report them and often avoid paying for those charges as long as you alert the bank promptly.
Earn Rewards
There are times when users earn rewards, cashbacks, etc., with a secured credit card. There are some credit cards that offer a wholesome rewards program similar to those with an unsecured credit card. This means while you are building your credit score, you can earn discounts, cashbacks, or other perks on your purchases. It’s a win-win situation where you gain benefits while improving your financial status.
Bottom Line
If we are opting for a secured credit card, we have the assurance that we are not going to overspend and spend over the limit. Choosing a secured credit card can be a wise decision for anyone looking to build or improve their credit. With lower fees and easier approval, it provides a practical way to manage finances. By making on-time payments and keeping your balance low, you not only boost your credit score but also open up future financial opportunities, such as loans or unsecured credit cards with better benefits. It’s an investment in your financial future that helps create a solid credit history, making it easier to handle emergencies and unexpected expenses.