Do you find yourself struggling to get a credit card due to a low CIBIL score or no credit history? Are you looking for an opportunity to rebuild or establish your creditworthiness?
If so, you might have come across the concept of secured credit cards. This article aims to explore the pros and cons of secured credit cards and help you decide if they are the right choice for your financial situation.
Understanding Secured Credit Cards
Secured credit cards necessitate a security deposit as collateral, which serves as a safeguard for the card issuer and minimise the risk if the cardholder is unable to make timely payments. While secured credit cards operate much like unsecured credit cards in several aspects, there are some distinct disparities between the two.
How do they differ from unsecured credit cards?
- Security deposit requirement: With secured credit cards, you need to provide a security deposit which generally determines your credit limit. Unsecured credit cards do not require a deposit.
- Approval process: Secured credit cards are generally easier to obtain for individuals with low CIBIL scores or no credit history, while unsecured credit cards often require higher credit scores.
Requirements for obtaining a secured credit card
- A security deposit (usually a percentage of the desired credit limit)
- Proof of identity and address
- A stable source of income
- A bank account.
Pros of Secured Credit Cards
Easier approval process for individuals with low credit scores or no credit history
Secured credit cards are often more accessible to those who have a low CIBIL score or lack a credit history. Since the security deposit acts as collateral, card issuers are more willing to approve applications from people who might otherwise struggle to obtain an unsecured credit card.
Opportunity to rebuild or establish credit
- Regular reporting to credit bureaus: Most secured credit card issuers report your payment history to credit bureaus like CIBIL. By making timely payments and using your secured credit card responsibly, you can improve your CIBIL score over time.
- Demonstrating responsible credit usage: Using a secured credit card wisely, such as keeping your credit utilisation low and paying your balance in full each month, helps demonstrate your ability to manage credit responsibly.
Security deposit as collateral reduces risk for lenders
The security deposit associated with a secured Onecard credit card reduces the risk for card issuers, which can result in more lenient approval requirements and potentially lower interest rates.
Potential for credit limit increase and account upgrades
As you demonstrate responsible credit usage with your secured credit card, some card issuers may increase your credit limit without requiring an additional deposit. Additionally, some issuers may offer the option to upgrade to an unsecured OneCard credit card after a certain period of on-time payments.
Cons of Secured Credit Cards Security Deposit Requirement
- Amount required and how it impacts credit limit: The security deposit for a secured credit card determines your credit limit. For example, if you provide a deposit of Rs 10,000, your credit limit will likely be around Rs 10,000. It can be a drawback for those who need a higher credit limit but cannot afford a larger deposit.
- How long the deposit is held by the issuer: The card issuer holds your security deposit for the duration of your account. If you close the account or upgrade to an unsecured credit card, your deposit will be refunded, provided you have no outstanding balance.
Lower credit limits compared to unsecured credit cards
As mentioned earlier, secured credit cards typically have lower credit limits than unsecured credit cards. This can be a limitation for individuals who need access to more significant lines of credit.
Risk of negative impact on credit score if used irresponsibly
Just as responsible usage of a secured credit card can improve your CIBIL score, irresponsible usage can harm it. Late payments, high credit utilisation, and unpaid balances can all negatively impact your credit score.
Secured credit cards can be a valuable tool for individuals looking to rebuild or establish their credit. However, they also come with certain drawbacks, such as security deposit requirements and lower credit limits. It’s essential to carefully evaluate your individual needs and circumstances before deciding if a secured credit card is the right choice for you.