What are secured credit cards and how do they work?

Is your poor credit score impacting your ability to get a credit card? You do not have to worry. Secured credit cards offer the way for individuals with poor credit scores. Credit cards are basically unsecured loans that offer you advances based purely on your track record in managing your finances.

But secured credit cards, which are issued against fixed deposits (FD) with banks, help individuals with poor financial records to get access to the credit product.A secured credit card usually gets approved only when you provide a collateral, which is almost always an FD.

How does it work?

A secured credit card works like any regular credit card. You can use it to make your payments without any hassles. But the FD you have with the bank would be used if you do not pay your outstanding dues on time.The available credit limit is typically equal to the FD under the arrangement.This prevents cardholders from overspending.

Secured credit cards would be helpful for a host of people including youngsters starting their careers and those trying to get over their financial hardships.You can get a secured credit card without any income proof.

What are the benefits?

Secured credit cards are quite useful for those who neither have a long credit history nor a good credit score. They are easier to obtain compared to unsecured credit cards. Secured credit cards are given to individuals with no credit record as the collateral in the form of an FD lowers the risk substantially for the issuer.

They enable you to build or rebuild your credit history or credit score by paying your bills on time. It is a good tool if you want to improve your chances of getting better repayment terms, interest rates and attractive offers on loan products in the future. Credit bureaus receive regular reports of timely repayments, which gradually allows you to build a healthy credit score.

Most banks provide customers secured credit cards either at a nominal charge or in some cases without any annual or joining fee. The cash withdrawal benefit is usually 100% of the credit limit. Individuals who open an FD of as low as ₹10000 would be able to avail secured credit cards from banks.

What are the disadvantages?

While secured cards offer some great benefits, they can be used only as an entry point to the world of credit cards. These cards offer credit only up to the limit of your FD, which is quite restrictive. Further, these cards are quite basic with much lower rewards and benefits compared to regular credit cards.Please do note that most banks do not offer secured credit cards against tax-saver FDs, flexi deposits (auto sweep FDs) and FDs in the name of HUF (Hindu Undivided Family), FDs held jointly, trusts, societies, partnership firms, and companies.

What happens to the FD used for getting the secured credit card?

Some banks offer interest on the FD used to get the credit card but only after a certain period, say one-year or 1 ½ year timeframe. This is done to ascertain whether the customer is paying the credit card dues on time. If the repayment record is good, banks start offering an interest on the FD.

If you cancel the secured credit card, you will receive the FD amount back if you clear all the outstanding dues. Conversely, the card issuer could convert your secured credit card into a regular card if your repayment record is good. In this case, you will be able to get your FD amount back.

Bank of Baroda Prime Credit Card

Allirajan M is a journalist with over two decades of experience. He has worked with several leading media organisations in the country and has been writing on mutual funds for nearly 16 years.