How Secured Credit Cards Can Help You Step Into The World Of Credit Score

Credit cards. Haven't we all not just heard of this term but in fact been using them in our day-to-day financial life?

Whether it's our regular grocery purchase, bill payments or the favorite gadget that we have been eyeing for a long time, credit cards as a payment mode help us in making all such spends and we conveniently repay later by the due date, besides fetching tons of offers or rewards on transactions as well.

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But, what about secured credit cards? Despite being no less than a useful financial tool just like regular credit cards, not many of us are aware of this term, right?

Eager to explore what secured credit cards are, and what special set of features, pros and cons they exhibit?

Read on as we unfold this entire concept for you, besides explaining how they can help you step into the world of credit score as well.

Understanding Secured Credit Cards

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The broad features of secured credit cards are similar to those of their regular counterparts ,such as reward points, discounts, vouchers, interest-free periods, etc. But, as their name suggests, these are secured in nature.

Simply put, banks issue secured credit cards against the collateral in the form of fixed deposits. So, you either need to pledge your fixed deposit against a secured credit card with the existing bank with which you have the FD and wish to avail secured card from, or you may create an FD with the bank from which you want to avail a secured credit card.

Now, the question that pops up is why would someone pledge an FD to avail a secured credit card? Why not simply take a regular credit card without blocking your money put in FD?

That's exactly where the target group of secured credit cards needs to be understood.

Also Read: Frequently (Not) Asked Questions - What Are The Risks Of Investing In 'Safe' Bank FDs

The Role Of Secured Credit Cards

No, not everyone needs to take these secured credit cards.

It's only those who are facing difficulty in getting a regular credit card approved who need to avail a secured credit card.

There are often times in life when people face rejection of their regular credit card application, with reasons varying from low income, unserviceable location, risky job profile to the lack of credit history or presence of low credit score. All such people are not just deprived of the benefits of credit cards, but are consequently also deprived of the chance of building a good credit score or improving an existing one.

Read here to know more about the importance of credit score and why you need to have a good credit score.

And, how can someone failing to get a regular credit card get a secured one?

Also Read: Why It's Important For Millennials To Check Their Credit Report Every Month

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The Presence Of Relaxed Eligibility Criterion

As secured cards are issued against the pledging of your FD, banks have a safety cushion to fall back on if you end up defaulting on your credit card payment in the future. That's what enables banks to offer a relatively relaxed eligibility criterion to applicants.

This way, those facing difficulty or rejection in getting a regular credit card approved, can explore these cards, as the less stringent eligibility criterion due to the presence of FD as collateral is what opens the doors for you to avail the benefits of a credit card and side by side keep building/ improving your credit score, which in turn makes you credit ready for availing a loan or credit card in future!

Also Read: Things That Impact Millennials' Credit Score That They Don't Even Know About

But What About The Pledged FD? Would You Earn Interest On It?

Yes. That's one of the biggest upsides of taking secured credit cards. Despite pledging your FD against a secured credit card, you do not lose interest on your pledged FD.

Your pledged bank FD continues to accrue interest till its maturity. This way, you get to fetch the benefits from both bank FD as well as the availed secured credit card!

The Credit Limit On Secured Credit Cards

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Unlike regular credit cards wherein your income and credit score are generally amongst the key criterion impacting your credit limit, the credit limit for secured cards is primarily based on the value of the pledged fixed deposits. Most banks usually offer credit limits up to 80%-90% of the pledged fixed deposit¡¯s value as a credit limit.

For example, if your pledged bank FD¡¯s amount is ?1 lakh, you can get a secured credit card with a credit limit of up to ?80,000-90,000 against it. But given that the product features, eligibility criteria etc. vary from bank to bank for different secured credit cards, make sure to enquire about the same before submitting an application.

Pledged FD's Withdrawal Not Permitted

Although your pledged FD does continue to earn interest despite being put as collateral for secured card, remember that you are not allowed to close that FD until the secured credit card is either closed or reaches the expiry date.

Also Read: Why Your Credit Score Can Fall Despite Timely Payments!

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How Do Secured Cards Help In Building/Improving Credit Score?

Your usage and repayment of secured credit cards is treated the same way by credit bureaus as in case of regular credit cards. So, your timely and full repayments of secured credit cards contribute similarly towards building a disciplined credit history or improving an existing credit score.

Especially for those who are not able to build a credit history or improve an existing one due to rejection of regular credit card¡¯s application. For all such people, secured credit cards can be a gateway to a strong credit score.

Also Read: How Millennials Can Kickstart 2022 On A Financially Strong Note

What To Keep In Mind Before Going For A Secured Credit Card?

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By now you must be pretty clear about the features, pros and cons of secured credit cards, right? Another key aspect to remember when availing secured credit cards, is that there may not be as diverse options v/s what regular credit cards have, both in terms of the number of banks offering it as well as the range of cards offered by each one of them.

But, amidst all this, it's equally important to remember the nature and target of secured credit cards. This category of cards, which are pretty generic in nature, aims to help those unable to get a regular credit card.

And through its relaxed eligibility criterion and similar features like their regular counterparts, they enable you to enjoy the twin benefits of having a credit card and building/improving credit score.

Once you are able to build a good credit history through disciplined repayments and usage of secured cards or improve an existing low credit score, you can later go ahead to avail a regular credit card and thus enjoy their wide range of super benefits!

Also Read: Why Do Millennials Fall Into Credit Card Debt Trap?

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