Understanding Secured Credit Cards and How it Works?

Credit Cards provide a great outlet for cardholder to improve their spending and purchasing power with their instant credit facility. However, there are some eligibility requirements, for example, a good credit score to obtain a credit card. Financial institutions such as banks do not offer credit cards to all their customer with a low income, no credit history, and a bad credit score. In such a scenario, the bank would issue a credit card against Fixed Deposit to the applicant with a low income and a bad credit score.

Definition- Secured Credit Card

A secured credit card is a kind of credit card that requires a fixed deposit as collateral against the line of credit and is typically issued to people who have a poor credit score and no credit history. A secured credit card, as opposed to a conventional or unsecured credit card, is issued by financial institutions such as banks in exchange for collateral. Assuming the cardholder is unable to make payment of the due amount, the fixed deposit acts as a security for the card issuer company. It helps the customers with no credit history or low credit score to rebuild and boost their credit score.

A Credit Card Against Fixed Deposit

Credit cards are unsecured debt instruments, due to which the interest rate is higher than the interest rate of secured debt instruments such as loans. Unsecured debts tend to be more expensive than secured debts because if the borrower defaults on payments, the lender will be unable to reclaim the due amount. A secured credit card differs from a conventional credit card in the aspect that secured credit cards require a fixed deposit as a security.

The cardholder applies for a secured credit card with the card issuer company. Typically 80-90% of the associated fixed deposit is set as the credit limit for a secured credit card.

A secured credit card comes with a lower interest rate when compared to unsecured credit cards. A regular monthly installment is payable against the due amount. Secured credit cards work as a safer option for the card issuing companies to offer credit to subprime borrowers or those with no credit history. Subprime Borrowers are the individuals representing a higher risk to the lenders due to their bad credit history.

Secured Credit Cards-: Basic Principles

The credit limit of secured credit cards is linked directly with the fixed deposit amount. Banks may provide the applicant with a credit limit based on the deposit amount. Higher the deposit amount higher will be the credit limit and vice versa.

The bank may charge the cardholder with an interest rate that may go up to 36 percent. The cardholder can not make a premature withdrawal from the deposit. If the cardholder fails to pay the due amount with interest, the bank may recover the outstanding amount by taking over the fixed deposit account. Fixed deposits serve as a ‘lien’ for banks if the cardholder fails to pay his or her credit card bill.

The cardholder would be unable to use his existing secured credit card attached to the fixed deposit once the account matures. In that case, the cardholder would not be able to use his credit card for the transactions, and he may apply for a new credit card with the bank.

Features of Secured Credit Cards

Secured credit cards offer a wide variety of benefits, and are designed for consumers who lack the necessary credit history for an unsecured or prepaid credit card.

• Fixed Deposits made against secured credit cards should be for a minimum tenure of 6 months.

• An interest-free period of 40-50 days is offered to the cardholders by the banks.

• The approval process is quick since the banks are risk-free because the cards are provided on the back of a deposit that serves as collateral.

• There are banks, which offer interest on the security deposit. That helps the applicants of secured credit cards to earn interest on their deposit along with the benefits.

How to Obtain a Secured Credit Card?

When it comes to secured credit cards, each bank has its own set of requirements. While some banks need a minimum deposit for the card, others require you to open a fixed deposit with the bank. The amount in the fixed deposit serves as a bank’s collateral in the event you are unable to pay your dues.

In case, a person already has an existing Fixed Deposit account, he can visit the nearest branch of your bank and fill an application along with and Identity proof such as an Aadhar card, PAN card Driving License, or Passport. No income proof is required to avail credit against Fixed Deposit

If a person does not have any Fixed Deposit in a bank, he can get the account opened by visiting the nearest branch of his preferred bank and apply for a secured credit card.

Advantages of Secured Credit Cards

Reduced Interest Rates-: Secured credit cards offer a lower interest rate when compared to standard unsecured credit cards. The banks provide lower interest because there is a lower risk associated with a secured credit card. The banks may use this fixed deposit as a lien against default in payments made by the cardholder.

Helps to Build Credit Profile-: Customers with no credit or limited credit history may find it harder to obtain a credit card. Banks issue credit cards based on the credit history of an applicant. Therefore, a secured credit card is a suitable option to choose from for anybody with low income or limited credit history to avail credit and build his credit profile.

No Income Proof mandatory-:  No income proof is required by the banks when applying for a secured credit card. Since the fixed deposit serves as security to the banks, making it an ideal choice for students, homemakers, and senior citizens to avail themselves of credit.

Parting Thoughts

Customers with no credit history, a low credit score, or no credit history at all might use secured credit cards to suit their financial demands. The majority of secured credit card financial tools used help build improve your credit. A secured credit card can help a borrower to avail credit at a cheaper price. However, secured credit cards do lack the flexibility of payments as compared to unsecured credits.

Frequently Asked Questions

What is the difference between a secured credit card and a prepaid credit card?
Secured credit cards get backed by a fixed deposit that serves as collateral for the card issuer. The deposit made by the cardholder determines the credit limit of the secured credit card.

Can I build credit through a secured credit card?
Yes, secured credit cards are a great way for an individual with a bad credit score or no credit history to build a credit profile.

Does a secured credit card have an interest-free credit period?
Yes, a secured credit card has an Interest-free period ranging from 30-50 days.

Where is a secured credit card accepted?
All online and offline stores, gas stations, supermarkets, restaurants, motels, and other businesses accept a protected credit card. It can be used as a standard unsecured credit card at any POS system.

Can I convert a secured credit card into an unsecured credit card?
No, Banks do not allow you to convert your secured credit into an unsecured credit card instead you need to apply for a new credit card.