What is a secured credit card and how does it work?
If you’re new to the world of credit or trying to rebuild your credit history, you may have come across the term “secured credit card.” But what exactly is a secured credit card, and how does it work?
What is a secured credit card?
A secured credit card is a type of credit card that requires a cash deposit as collateral for the credit line. Essentially, you’re putting down a deposit to “secure” the card. The amount you deposit will typically determine your credit limit. For example, if you deposit Rs. 50000, your credit limit may be Rs. 50000.
Secured credit cards are often recommended for people with poor or no credit history, as they can help establish or rebuild credit. Unlike prepaid debit cards, which are not reported to credit bureaus, secured credit card activity is typically reported to the major credit bureaus (Experian, Equifax, and TransUnion), so responsible use of a secured card can help improve your credit score over time.
Here’s how a secured credit card works:
- Apply for a secured credit card: You’ll need to find a credit card issuer that offers secured credit cards. Some issuers include HDFC Bank, ICICI Bank, Axis bank, etc.
- Make a deposit: Once approved, you’ll need to make a cash deposit to open the account. The amount you deposit will typically determine your credit limit.
- Use the card responsibly: You can use the card just like a regular credit card, but keep in mind that you’ll need to make at least the minimum payment each month to avoid late fees and interest charges.
- Monitor your credit score: Your secured credit card activity will be reported to the credit bureaus, so it’s important to monitor your credit score regularly. As you use the card responsibly, you should see your credit score improve over time.
- Graduate to an unsecured card: After a period of responsible use (typically 6-12 months), some issuers may offer to upgrade you to an unsecured credit card. This means you’ll get your deposit back and have a credit card with a higher credit limit.
It’s important to note that not all secured credit cards are created equal. Some may come with high fees, such as annual fees or application fees, so be sure to read the fine print before applying. Additionally, some issuers may not report to all three credit bureaus, so it’s important to do your research and find a card that meets your needs.
Benefits of Secured Credit Card
Secured credit cards can offer several benefits to individuals who are trying to build or rebuild their credit history. Here are some of the key benefits of secured credit cards:
- Access to Credit: If you have a limited credit history or have had credit problems in the past, a secured credit card can provide you with access to credit that you may not otherwise have. By using your secured credit card responsibly, you can demonstrate to lenders that you are able to manage credit responsibly.
- Building Credit: One of the primary benefits of a secured credit card is that it can help you build or rebuild your credit history. When you use your secured credit card and make payments on time, this information is reported to the credit bureaus. Over time, this positive credit activity can help improve your credit score.
- Credit Score Improvement: A higher credit score can lead to better interest rates, lower insurance premiums, and better terms on loans and credit cards. By using a secured credit card responsibly and paying your bills on time, you can improve your credit score over time.
- Upgrade Opportunities: Some secured credit cards offer the opportunity to upgrade to an unsecured credit card after a certain period of responsible use. This can allow you to receive your deposit back and access a higher credit limit.
- Budgeting Help: Secured credit cards can also provide a helpful tool for managing your finances. Because you must make a deposit to obtain the card, you can only spend up to the credit limit that is tied to your deposit. This can help you avoid overspending and stay within your budget.
A secured credit card is a type of credit card that requires a cash deposit as collateral for the credit line. By using the card responsibly, you can establish or rebuild your credit history and improve your credit score over time. Just be sure to choose a card with low fees and that reports to all three credit bureaus.
FAQs – Frequently Asked Questions
Q: Who is a secured credit card good for?
A: Secured credit cards are good for individuals with poor or limited credit history, as well as those looking to rebuild their credit.
Q: How does a secured credit card work?
A: To obtain a secured credit card, you must first make a cash deposit. The amount you deposit typically determines your credit limit. You can then use the card just like a regular credit card, making payments on time to build credit.
Q: Can secured credit cards help improve my credit score?
A: Yes. Secured credit cards can help improve your credit score over time as you use the card responsibly and make payments on time. This positive credit activity is reported to the credit bureaus and can improve your credit score.
Q: What fees are associated with secured credit cards?
A: Some secured credit cards come with high fees, such as annual fees, application fees, or monthly maintenance fees. It's important to read the fine print before applying for a secured credit card.
Q: How long does it take to graduate to an unsecured credit card?
A: The length of time it takes to graduate to an unsecured credit card varies by issuer, but typically takes 6-12 months of responsible use.
Q: Can I get my deposit back with a secured credit card?
A: Yes. Some issuers may offer to upgrade you to an unsecured credit card after a period of responsible use. This means you'll get your deposit back and have a credit card with a higher credit limit.
Q: Do secured credit cards offer rewards?
A: Some secured credit cards do offer rewards, such as cash back or points. However, these cards may come with higher fees or interest rates, so it's important to weigh the benefits against the costs.