October 1, 2024 · 10 mins read
Santosh Kumar
Have you ever wondered what is secured credit card meaning? A secured credit card is a practical option for individuals who want to establish credit or try to repair their credit history. Through prudent use of a secured credit card over time, you may redeem better financial products like unsecured credit cards and loans. Secured credit cards are an ideal entry point for those whose aim is to uplift their creditworthiness and build a stable credit history.
Secured credit cards are perfect for people interested in improving or establishing their credit history. Regardless of whether you seek to mend damaged finances, are new to credit or are repeatedly refused traditional credit cards in any situation, a secured credit card can assist you in building your credit history.
It's like the user takes a secured card against a cash deposit, which works like collateral. This deposit usually determines your credit limit as well—when you make a deposit of ₹ 10,000, you will get a credit limit of ₹ 10,000 as well. This system is beneficial for banks and financial institutions as it allows them to give loans to people with a higher credit exposure while the clients get a chance to learn sensible credit use.
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If people have a poor CIBIL score simply as a result of repayment delays, laziness, or excessive debt on their credit cards, they will most likely not be approved for a conventional credit card. Since 35% of your credit score is based on a once-payment history, bad past events can exercise a shadow on the finance profile for many years. Such a credit card is useful for persons looking to restore their credit history since it gives them an opportunity to show that they are capable of handling debt prudently. If you pay your secured card on time and maintain low balances, you can expect steady upward movement of your credit score.
For the most part, young people, almost everybody who is aiming at improving their credit standing for the first time and has never taken any loan or even bought a credit card herself, can use a secured credit card as an uncomplicated sneak into the credit world. Establishing a good credit history at a very tender age is essential because it determines how easy or hard an individual will face while trying to get any loans, mortgages or apartments. First-time users of the card can start building their credit profile and history by the use of a secured credit card, which is less risky since the security deposit secures the lender.
Conventional credit cards usually have stringent eligibility criteria, such as minimum CIBIL score, stable proof of income, and good credit history. When a traditional credit card has been a headache, then a secured card can be a better alternative. Because your security deposit secures the card, more applicants with either bad credit or no credit cards at all are likely to be approved by the issuers than when they do not require any deposits from the applicants. However, using a secured card for some time allows you to be issued with a normal card with better features.
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The major advantage of a secured credit card is its capacity to assist you in developing credit or re-establish it. Most secured cards report your payment history to major credit bureaus like CIBIL. Consistently repay any debt you do, especially any revolving credit and try to keep your balance under thirty per cent. Over time, this would translate to an improvement in the CIBIL score, allowing the individual to avail financial tools like personal loans or unsecured credit cards at better terms.
When trying to obtain a regular card, but the credit score status is too poor, there comes the need for a secured credit card. This is because secured cards contain a credit deposit, which reduces risks for the card marketer; thus, they are more ready to approve desperate individuals for credit. Though you will be assigned a small amount of credit facility to begin with when you use the card appropriately, you will have a good credit history, and therefore, you will be able to obtain larger amounts of credit in the future.
Since your credit limit on a secured card is only as much as you deposit, the chances of you incurring more unmaintainable debts are slim. This internal restriction promotes responsible spending habits and averts the possibility of budget overage or getting into a debt trap that is hard to walk out of. In such circumstances where one is a compulsive buyer or has been under a burden in debt calendars, the lesser credit deposit is a safe mechanism to relearn uncharging habits for the health of finances.
Some providers of secured credit cards will allow the user to transfer to an unsecured card after a certain amount of responsible use. This usually takes 6 months to a year to never miss a payment. After the borrower meets the criteria, the credit card issuer will refund the security deposit and increase the credit limit. These new opportunities allow for extending less risky and rewarding poles, including higher credit limits, reduced interest rates, and reward programs.
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As with any credit product, prompt payment of the credit card bill is important. Even with a secured card, you will suffer from missed payments. Set up automatic payments or reminders to avoid this.
Maintaining a credit utilization ratio that does not exceed 30 % is advisable to improve your credit score. It refers to the percentage of your credit limit that you are making use of. For instance, where the credit limit is ₹10,000, the balance should never be more than ₹3,000.
You should always check your CIBIL report to know what their efforts at building credit are yielding. It is good to check your report often to see if any errors and issues are not helping your score and need to be resolved.
Yes, there is an urge to apply for several secured cards at the same time. However, this will damage your score instead. Each application is followed by a hard enquiry, and that has a negative effect on the credit score, especially if done repetitively. First, use the secured card and look for ways to improve its usage before applying for more cards.
When it comes to comparing secured credit cards and unsecured credit cards, the focus of interest will be on the security deposit. For instance, a secured credit card is issued with the formation of the requirement that the cardholder places a refundable deposit in case the borrowing amount is not repaid, whereas an unsecured credit card does not have this deposit requirement. Now let us take a more in-depth look at the advantages and disadvantages of each type:
Secured credit cards are targeted specifically at persons whose main aim is to recover or improve their credit scores. The deposits act as security for the company offering the service equal to the credit limit. So, for instance, it may be stated that if the customer puts in a deposit of ₹10,000, then in normal circumstances, it would be around ₹10,000 proportional to the fund's limit.
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Secured credit cards are offered for people with bad credit or for persons who have never been active in seeking credit facilities. The security deposit lowers the issuer's risk, so it is easier to get approved for loans.
Secured cardholders are people looking for ways to rebuild their credit history. If they are able to stick to the set limits on time and on the amount borrowed, they can show good credit management.
A number of secured credit cards update the credit report accounts with CIBIL on timely payments, which adds to your credit score effectiveness.
Read More:: Credit Score Vs CIBIL Score
The most obvious disadvantage of a secured credit card is that it requires cash collateral, which can be a perfect use of cash in other areas.
This is mainly for secured cards intended to aid in credit repair, as they carry a risk of high interest, especially when the balance is carried forward.
Secured credit cards are issued with lower limits than unsecured credit cards due to the credit offered being equal to the deposit.
As its name suggests, an unsecured credit card does not require a security deposit. These cards are simple and useful to people with good to excellent credit scores. With so many last classes of credit cards, spin-offs like external utilities and services include reward programs, cash back, and reduced interest rates.
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You cannot pay a security deposit because unsecured cards do not require any money to be deposited ahead of time, which implies that you have more of your money available.
Unsecured cards have a higher credit limit than secured cards, making them easier to use for large purchases and credit utilization.
With an excellent credit history, various unsecured credit cards provide not just purchasing power but reward schemes, travel perks, and low rates in cases where some higher rates are usually the norm.
Requiring no cash deposit means that unsecured cards expose the issuer to a greater amount of risk, which makes them more cautious about who to approve. Only a few people with poor credit scores can obtain these cards.
Thus, after utilizing the secured credit card, the ultimate ambition is to get an unsecured card. Responsible usage – timely repayments and low credit utilization – can positively affect your credit score within 6 – 12 months.
Read More:: RBI Guidelines for Credit Cards
For those with credit issues or no credit history, secured credit cards present a very sensible and practical option for building or rebuilding credit. The gradual repayment and ease of balance enable you to improve your CIBIL score and thus open up better options.
What is secured credit card meaning?
A secured credit card is a practical option for individuals who want to establish credit or try to repair their credit history.
Can I recover my security deposit?
Yes, as long as you clear your balance, you may expect to recover your security deposit once you terminate the account or switch to an unsecured card.
Do secured credit cards provide any bonus features?
Some secured cards give cash-back rewards, but not from all issuers.
Will my credit score go down if I use a secured credit card?
Excellent credit will take time, but factors like regular payment patterns and low balances will ensure improvement.
Are there any annual fees applicable on secured credit cards?
Some issuers may require the payment of an annual fee, while others do not. This differs from issuer to issuer.
Can I add more funds to my secured credit card?
Usually, you can do so through the security deposit by increasing its amount.
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