Spend only as much as you can afford to repay, do not exhaust the entire credit limit and establish a strong repayment history.
It is also important to regularly monitor the usage on your secured credit cards as well as your monthly credit score to see the impact.
_________________________________
Radhika Binani
A good credit score not only opens doors to multiple credit opportunities but also gives you the power to negotiate a better deal with lenders. However, individuals who are new to credit or those with a damaged credit score might face difficulty in getting approval for loans and credit cards. They would first need to build a good credit score to increase their chances of availing loans at a more favorable interest rate or a credit card that suits their needs. Secured credit cards could come as a valuable tool for such consumers to help build a solid credit profile.
Collateral needed
Issued against a collateral, generally a fixed deposit, secured credit cards require the users to make a deposit upfront. This serves as collateral, thus lowering the risk for the card issuer while offering a crucial chance for users to rebuild their credit. If the user defaults on credit card payments in future, the issuing bank has the right to use the deposit amount to cover their losses.
The deposit amount also determines the credit limit offered on the secured credit card. The issuer offers 8090%, sometimes up to 100%, of the deposit as credit limit.
Apart from requiring a deposit, secured credit cards function the same way as unsecured credit cards. Cardholders can use it to make purchases online and offline, convert big-ticket expenses into EMIs and earn value back on spends in the form of reward points or cashback.
Low/no fee
While most secured credit cards charge a very low or no annual fee and come with a basic rewards or cashback programme, some secured cards may also offer accelerated earnings on select categories.
For example, the IDFC FIRST WOW Credit Card offers up to 3X reward points on UPI spends and Kotak 811 Dream Different Credit Card offers 2X rewards on online spends.
You can maximise benefits with optimal use of the value-back programme on the secured credit card. You can use the card to earn accelerated rewards, discount deals and avail other limited period offers. However, you should not overspend just to earn more rewards.
Primarily, a secured credit card helps you rebuild a poor credit score or start your credit journey. Since the activity on secured credit cards is reported to the credit bureaus, you can show responsible behaviour by making timely payment of credit card bills. Spend only as much as you can afford to repay, do not exhaust the entire credit limit and establish a strong repayment history.
If rebuilding credit is your primary concern, it is also important to regularly monitor the usage on your secured credit cards as well as your monthly credit score to see the impact and stay on track.
In addition to availing the benefits of a credit card, users will also earn interest on their deposit against which the card is issued. The rate of interest varies from issuer to issuer and also based on the fixed deposit tenure. With IDFC FIRST WOW Credit Card, for example, you can earn 7.5% interest on your fixed deposit. Hence, secured credit cards offer benefits in three ways:
1) You can avail general benefits of a credit card like EMIs, up to 50 days of interest free period, reward points, etc.
2) You will earn interest on your deposit
3) With responsible usage, you can build or improve your credit score.
While selecting a secured credit card, you should compare different options and choose the one where the rate of interest on deposit is higher and, at the same time, the card offers benefits more aligned to your purchase patterns.
Making a transition
By showcasing responsible credit management with secured credit cards, you can position yourself for a transition to unsecured credit cards. Unsecured cards typically offer higher credit limits as well as better benefits. With an improved credit score and a history of responsible credit usage, you could be eligible for unsecured cards that better align with your spending habits and could help you save a substantial amount on your regular spends.
Card upgrade
Sometimes, card issuers take note of these financial habits and may offer an upgrade to their secured credit cardholders. However, if your card issuer is not offering an upgrade, you can consider applying for an unsecured card after using the secured card responsibly for at least 6 months.
Secured cards can prove to be the steppingstones of building a positive credit profile by demonstrating disciplined usage, opening the doors to more credit opportunities.
(The writer is Chief Product Officer, Paisabazaar)
Courtesy: The Hindu dt. 5th Feb 2024
No Comments