When you think about instant source of money for taking care of any issues, the first option that comes to your mind is using your credit card.
However, using the credit card can be a big help sometimes and can also create a big dent in your wallet at other times.
Some people are not able to take care of their credit card bills, ending up with mounting payments and subsequently bad credit history. This results in diminished chances of their getting financial assistance from banks in the form of personal loans, home loans and the like.
Maybe this is the reason for the reduced usage of credit cards. A recent report by Reserve Bank of India indicated declining use of credit cards in India. The credit card count fell by 1.36 million between February 2008 and 2009 on a year-on-year basis.
In a scenario where credit card limits of credit card holders are being reduced or are being denied credit facilities due to bad credit history, what can one do? Secured credit cards can come to your rescue here.
What are secured credit cards?
A secured card requires a cash collateral deposit that becomes the credit line for that account. For example, if you put Rs 50,000 in the account; you can charge up to Rs 50,000.
You may be able to add to the deposit to add more credit, or sometimes a bank will reward you for good payment and add to your credit line without requesting additional deposits.
The credit limit on a secured card is based on your credit history and the amount you credit in your account. The limit is expressed as a per cent of the amount in the account and is usually varies between 50 per cent and 100 per cent .
How does it help?
By issuing a secured credit card against collateral, the bank minimizes the risk involved, as the cardholder can spend as much as they hold. In case of non-payment of outstanding amount on the card, the bank reserves the right to charge/recover the dues from the deposit made by accountholder.
This ensures that the account holder always tries to handle his/her expenses better since this is not credit from a bank, but in a way their own money which ensures more integrity in managing expenses and payments.
What are the eligibility requirements?
Like applying for any other conventional credit card, account holders are required to furnish almost the same kind of documents for getting a secured credit card. Documents include:
- Proof of Identity and Age
- Proof of Income
- Bank Statements (last 6 months in most instances; a year in a few instances)
- Guarantors (if applicable as per bank policy)
Do all banks offer secured credit cards?
In India, there are few banks which offer secured credit cards and majority of these are in the private sector. The reason behind this is that banks are more focused on unsecured credit cards, even if there is more amount of risk involved, owing to the high amounts of profits to be made from interest and other charges.
What are the advantages and disadvantages of using a secured credit card?
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Advantages |
Disadvantages |
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Lesser risks for banks: Paying the security deposit gives the card issuer incentive to accept your application. |
Security Deposit: You have to pay the security deposit. It might be difficult to come up with Rs 5,000 to Rs 100,000 for the secured credit card. If you do have that money, it might be better spent paying off some outstanding debt. |
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Building your credit history: A secured credit card reports your payments to the credit bureau to be included on your credit report. This can help you to build a good credit history owing to the fact that making regular payments will be reported to the credit bureau. |
Fees: There are fees in addition to the deposit. You might have to pay an application fee, processing fee, and annual fee to have your secured credit card. This increases the cost having the card. |
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Reduced risks of debt collectors: Your security deposit is used if you default on your payment. Unless you spend over your deposit, you won't get sent to collections for defaulting on your payments. Though the card issuer will keep your deposit, you don't have to worry about debt collectors hounding you for missed payments on the card. |
Higher interest rates: Secured credit cards don't usually offer competitive interest rates because of the risk of default. |
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Earning Interest: Some secured credit cards place your deposit into an interest-bearing savings account. Depending on the interest rate, you might be able to earn a few bucks. |
What should one keep in mind while applying for a secured credit card?
Before you apply for a secured credit card, you must keep in mind a couple of things:
- The prospective issuer is legitimate and recognised
- Amount of deposit required
- Credit limit offered on the deposit
- Fees (annual charges, late payments, interest, etc.)
- Grace period for payments
- Interest on deposit (if applicable)
