All you need to know about secured credit cards!

A credit card is an unsecured loan. Unsecured because you don’t have to give anything as security for your loan. Almost all major banks and NBFCs in the country provide credit cards. But there are credit cards that are available on secured loans as well. These are called secured credit cards.

These cards are available in lieu of bank FDs, meaning bank FDs are kept as collateral. If you default on payment, the card issuing company will recover that money from your fixed deposit.

You may be confused by the features of secured credit cards and prepaid credit cards. But there is a difference between the two. Where collateral has to be given in a secured credit card, prepaid credit cards work like gift cards. In contrast to prepaid credit cards, funds are not pre-loaded in secured credit cards.

Why are secured credit cards becoming popular?

Secured credit cards are rapidly becoming popular in the country. OneCard, Step UP Credit Card, SBI Card Unnati, Axis Insta Easy Credit Card are some popular examples of secured credit cards. Now let’s understand how these work. To get this type of credit card, you must have a fixed deposit. These are mainly designed for those who have difficulty in getting a loan due to zero credit history or poor credit score. With the help of this card, you can build or improve your credit score. In most secured credit cards, the credit limit is the full amount kept in FD. Up to 100 percent of the FD amount can be your credit limit, meaning if you have 2 lakh rupees in your FD account, then the limit can be full 2 lakh rupees.

Now let’s talk about both the benefits and disadvantages of these cards:

One reason for the growing popularity of these cards is the attractive offers. Most e-commerce platforms offer discounts on shopping with these credit cards. These credit cards are easily available with FDs. These are also easy to use. There is no lock-in period in FDs. With a minimum deposit of 2,000 rupees, you get a card, you can increase your credit limit whenever you want by depositing more money in your FD.

For example, for OneCard, you will have to open an FD in partner banks such as SBM Bank, South Indian Bank, Federal Bank, CSB Bank, Bank of Baroda. All these are RBI approved banks. It is claimed that One Card  gives you a two-in-one benefit. One, you get a credit card, and secondly, you also keep getting high interest rates on FDs. These cards work as a refundable security deposit for you.

For most credit cards, you just have to download an app. If you want to close your FD, even if you want to deactivate the card, you can do it easily. You can do this through the app.

Says Gaurav Jalan, Founder & CEO, mPokket “While secured credit cards act as a valuable tool for rebuilding credit, they come with a range of advantages and disadvantages that should be considered carefully. The requirement of a security deposit is one of the drawbacks, presenting a significant financial hurdle for individuals with limited liquidity or low funds at their disposal. Furthermore, secured credit cards often provide lower credit limits, which may not meet the needs of people with substantial expenses. The imposition of various fees, including annual, application and processing fees, also inflates the overall cost of maintaining a secured card. Additionally, the absence of rewards programs means cardholders miss out on the opportunities to earn cashback or points for their expenditure”.

“Lastly, secured credit cards typically entail higher interest rates, dimming their appeal for customers with an outstanding balance. Nevertheless, not all secured credit cards carry these disadvantages, and some may offer benefits that outweigh the cons. The credit card journey is often slow and requires consistent, responsible use over an extended period. However, diligent research and careful comparison of available secured credit card options are crucial before choosing what best suits one’s financial needs”, Jalan continues

As we have mentioned earlier, these cards are right for those who have difficulty getting a loan due to zero credit history or poor credit score. If you pay the bill on time every month, your credit score will start to build up and your bad credit score will start to improve.

So, is everything is only good with such cards.  The answer is no. There are also some problems such as the risk of losing collateral in case of default in payment. There is risk of losing high returns on FDs. The credit limit will be determined by the amount deposited in FD, so if there is less money in FD, you will not get the opportunity to spend more.

So hope now you would have understood all aspects related to secured credit cards. If you are planning to apply for it then you should consider things we have discussed.