In a vast landscape of credit options, you need to know about different financial alternatives. Most credit card issuers offer two types of credit cards. One is the secured credit card, and the other is the unsecured one. The main difference is that a secured card necessitates paying the credit card issuer a security.
Secured credit cards are one of the important credit options that can offer you higher financial flexibility. Using responsibly can also help you build good credit and achieve a higher credit score.
Before applying for the same, it is vital to understand a secured card, how it works, and the best ways it can help you.
What is a Secured Credit Card?
A secured card is one of the popular credit cards, where the cardholder must pay a collateral or cash deposit or fixed deposit in the bank for issuance. A secured credit card is issued with a guarantee. This credit card type is often issued to people with a low credit score or a limited credit history.
Secured Credit Card: Top Features
Here is what you need to know about a secured credit card:
1. Backed by Collateral/Deposit
Unlike a normal credit card, a secured credit card is supported by a deposit or collateral. The lender uses the same when the cardholder doesn’t make card payments on time.
2. Eligibility
All credit card companies have their eligibility criteria for secured credit cards. The eligibility criteria for secured credit cards are far more relaxed than unsecured credit cards. The issuer provides a secured credit card in return for a fixed deposit. This secures the credit card company because the bank can use the cardholder’s fixed deposit money and mitigate losses in the case of credit card bill default.
3. Interest on Collateral
Another thing you must know is that the security or fixed deposit against which the cardholder receives the secured credit card earns interest till maturity.
4. Boosts Credit Score
The credit bureaus also consider using secured credit cards when calculating the credit score. Responsible usage of secured credit cards can help users boost their credit scores. People with nil or low credit scores can get secured credit cards and start building their credit.
5. Credit Limit
The secured credit card limit depends on the security/fixed deposit value. The credit limit usually equals the deposit amount, and the cardholder cannot exceed the credit limit.
How does a Secured Credit Card Work?
When you apply for a secured credit card, firstly you must make a cash deposit payment or open a fixed deposit with the issuer. The amount of the deposit varies with the company. This deposit works as collateral against the credit limit, which is kept equal to the amount deposited.
After making the deposit, you receive a secured credit card. You can use the same as any other credit card to do shopping, pay bills, etc. The secured credit card also allows you to save money by providing attractive deals and discounts, a chance to earn reward points, and many other benefits.
However, it is critical to ensure timely payment on the card. Failing which, the issuer can use the deposit amount and recoup the losses. This will also lower your credit bureau score.
Reasons for Owning a Secured Credit Card
There are many advantages of owning a secured credit card, such as:
1. Easy approval
Secured credit cards have a relaxed eligibility criterion than unsecured credit cards. People with poor credit health or zero credit history can also get this card. Since the card issuer gets the cash deposit or collateral, they avert the risk and issue you the credit card.
2. Credit Building
One of the main benefits of using a secured card is credit building or credit rebuilding. Using the card responsibly, making monthly payments before the due date, keeping the credit utilization ratio low, etc., can exhibit yourself as a responsible borrower. This gradually builds credit and boosts your credit score.
3. Avail Credit
If you have no credit, you may find getting a unsecured credit card or loan approval challenging. Using a secured credit card responsibly will demonstrate responsible credit behavior, establish a positive credit history, and make you an eligible borrower.
4. Increase Credit Limit
The secured credit card also allows you to push your credit limit up. When the borrower displays responsible behavior, the issuer increases the credit limit over time. A higher credit limit means a better credit utilization ratio and an enhanced credit score.
5. Convenient Usage
You can use your secured credit card to make everyday purchases and pay monthly bills, just like any other credit card. You can also benefit from the easy EMI feature and ensure financial wellbeing. However, it is important to note that not all secured credit cards offer such advantages. Research and compare your options before applying for one.
Wrapping Up
A monetary deposit or collateral backs a secured credit card. People with a limited credit history or poor credit score can benefit from a secured credit card. Since the credit bureau tracks the same, the cardholder can maintain healthy credit card practices and boost credit bureau scores over some time. When a cardholder clears their dues on time, the card issuer may raise the credit limit or upgrade the secured card to an unsecured one.
Disclaimer: This article provides a general guide to the subject matter. You should seek specialist advice about your specific circumstances.
FAQs
1. What is a secured credit card?
Ans. A secured credit card needs you to pay a security deposit to open a credit account. It averts the possibility for the issuer to lose money, if the credit card holder does not pay the bill.
2. Can a secured card increase your credit score?
Ans. A secured credit card is one of the best and quickest ways to increase your credit score. If you use the card responsibly, pay the bills before the due date, keep the credit utilization below 30%, etc., you can build your credit.
3. What is the difference between a secured credit card and an unsecured credit card?
Ans. An unsecured credit card does not need you to pay a deposit or collateral. A secured credit card is covered by a deposit or collateral, offering security to the card issuer if the cardholder fails to make payments.
4. Who should get a secured credit card?
Ans. A secured credit card is the best option for people with poor credit scores or no credit history. A secured credit card can help them build credit with responsible use.
5. What is the difference between a secured card and a prepaid card?
Ans. Both secured and prepaid cards need you to provide funds. A prepaid card immediately deducts the purchase amount from the account balance. The deposit money in a secured credit card remains unaffected when you purchase. Also, a prepaid card does not report to credit bureaus, while secured credit cards do.
6. How to close the secured credit card?
Ans. If you have regularly made your credit card payments, you can close a secured credit card anytime and receive the deposit back.