Credit cards offer rewards, cashbacks, and discounts on purchases. Timely payments can boost your credit score. However, not everyone qualifies for a credit card. The lack of a credit history or a poor credit score can prevent you from obtaining one. This is where secured credit cards come into play, bridging the gap for those with limited credit history.
What are secured credit cards?
Secured credit cards, unlike regular credit cards, require the prospective cardholder to put forward collateral, usually a fixed deposit (FD), with the card-issuing bank. The credit limit is usually 80-90% of the deposit amount. Hence, these cards are also called FD-based cards.
“Among the largest credit card issuers, we see the advertised values range from ₹25,000 to ₹50,000. Smaller banks can accept small deposits of a few thousand rupees, but one must remember that your card’s spending limit is tied to your deposit. The limit could go up to 100% of the deposit in some cases, but typically is around 80-90%,” said Adhil Shetty, co-founder and chief executive officer of BankBazaar.com.
Interest rates
The payment cycles of secured credit cards are the same as those of unsecured cards, but the difference is in the interest rates. Secured cards may come with lower interest rates because the issuing bank already has an underlying security in the form of the FD. For example, a large issuer advertises a revolving rate of 1.99% per month, or 23.88% annually, for secured cards whereas its rates on other cards go up to 3.49% to 3.75% per month.
What about rewards?
Those opting for secured credit cards may not get the same rewards as those with regular credit cards. Regular credit cards or unsecured credit cards are given to customers who meet certain credit and income profile criteria and hence they come with better reward structures vis-a-vis secured credit cards.
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Penalties on missing dues
The penalties for missing payment of dues depend on the terms and conditions of the card.
“Typically, the applicable interest rate on rolling credit, late payment penalties, and any other charges as laid out in the terms and conditions will apply,” said Shetty of BankBazaar.com. “But in a secured card, the bank can also liquidate your fixed deposit to recover principal dues, interest dues, fees and penalties. The bank has an immediate lien on the collateral. In case of a default, the bank may not be required to give you a notice about its liquidation.”
However, remember that missing your dues will still impact your credit score, even with collateral in place.
Who should opt for it?
Secured credit cards are especially beneficial for those who are yet to build their credit history, don’t have proper income proof or need to revive their credit score.
“Secured credit cards offer an opportunity to establish creditworthiness and demonstrate responsible financial behaviour to individuals that lacked access so far. Once a good track record has been built, these individuals can be eligible for unsecured cards with better terms and benefits,” said Raj Khosla, founder and managing director of MyMoneyMantra.com.