Imagine standing at the threshold of a grand financial future. Doors to loans, dream homes, and even exciting credit cards seem locked, guarded by a mysterious gatekeeper called “credit history.” But fear not, as there is a way to overcome this challenge and improve your credit profile. You can use secured credit cards, to build your credit history and credit score.
Now, you might be wondering, “What a secured credit card is, and how can it help?”
Think of a secured credit card as a training wheel for your financial journey. Unlike regular credit cards, it requires a deposit (think of it as a security blanket) that matches your credit limit. This deposit assures the lender of your commitment and helps build your credit history with every responsible swipe.
How do secured credit cards work?
Secured credit cards are credit cards that are backed by a fixed deposit (FD) account that you open with the issuing bank. The credit limit of the card is usually a percentage of the FD amount, ranging from 70% to 90%. For example, if you open an FD of ₹1 lakh, you get a secured credit card with a credit limit of ₹70,000 to ₹90,000, depending on the bank. The FD acts as a guarantee for the card, and in case you default on your payments, the bank can recover the dues from the FD.
Secured credit cards are different from regular or unsecured credit cards, which are issued based on your income, credit score, and other eligibility criteria. With secured credit cards, you do not have to provide any income proof, credit score, or other documents, except your KYC documents and FD receipt. You could get a secured credit card even if you have no credit history or a low credit score, as long as you have an FD account with the bank.
Secured credit cards work like any other credit card, except that they are linked to your FD account. You can use the card to make online and offline purchases, pay bills, book tickets, and avail of other benefits, such as reward points, cashback, discounts, etc. You will also receive a monthly statement of your transactions, and you will have to pay the minimum amount due or the total amount due in time. If you pay the total amount due before the due date, you wouldn’t have to incur any interest charges. If you pay only the minimum amount due or less than the total amount due, you will have to pay interest on the outstanding balance, as per the bank’s terms and conditions.
The interest rate on secured credit cards is usually higher than that on regular credit cards, ranging from 2.5% to 3.5% per month. The interest rate is also applicable on cash withdrawals, which also attract a cash advance fee of 2.5% to 3.5% of the amount withdrawn. Therefore, it is advisable to avoid cash withdrawals and pay the total amount due before the due date to avoid interest charges and fees.
The FD account that is linked to your secured credit card will continue to earn interest as per the bank’s rate. However, you will not be able to withdraw or close the FD account until you surrender or cancel the card. If you want to increase your credit limit, you can increase your FD amount, subject to the bank’s approval. If you want to decrease your credit limit, you can request the bank to reduce your FD amount, subject to the bank’s approval.
How can secured credit cards help you build your credit history?
Secured credit cards could help you build your credit history and score, as the banks report your card usage and payment behaviour to the credit bureaus, such as CIBIL, Experian, Equifax, and CRIF High Mark. These credit bureaus collect and analyse your credit information and assign you a credit score, which ranges from 300 to 900. A higher credit score indicates a better credit profile and a lower credit risk, while a lower credit score indicates a poor credit profile and a higher credit risk.
By using your secured credit card responsibly and ensuring timely repayments of your dues, you end up improving your credit score over time, by demonstrating your creditworthiness. A good credit score can help you get better deals on loans, credit cards, and other financial products in the future. It can also help you get higher credit limits, lower interest rates, and more benefits on your existing and new credit cards.
However, if you misuse your secured credit card or default on your payments, you can damage your credit score and hurt your credit profile. A bad credit score can make it difficult for you to get loans, credit cards, or other financial products in the future. It can also affect your existing and new credit cards, as the banks may reduce your credit limit, increase your interest rate, or impose penalties and fees on your card.
Therefore, it is important to use your secured credit card wisely and pay your dues on time, to build your credit history and score.
What makes secured credit cards special?
Here’s the magic:
- Every timely payment: Rent paid on time? Groceries swiped responsibly? Each responsible transaction gets recorded, building your credit score like bricks on a sturdy wall.
- No more “credit history, what credit history?”: As your score grows, you graduate from the training wheels! Soon, doors to conventional credit cards and loans swing open, offering you greater financial flexibility.
- Responsible spending habits: The secured card acts as a gentle reminder, encouraging you to spend within your means, a valuable skill for any financial warrior.
But hold on, let’s address some concerns:
- Deposit: Yes, you’ll need to part with some initial cash as a deposit. Think of it as an investment in your future financial freedom.
- Interest rates: Secured cards might have slightly higher interest rates than regular cards. Remember, they’re like training wheels – use them for a while, then graduate to better options.
- Discipline is key: Responsible, on-time payments are crucial for building your credit score. Late payments can have the opposite effect, so use the card wisely.
Now, here’s how you can make it happen:
- Compare secured credit cards: Look for cards with low annual fees, reasonable interest rates, and good credit-building potential. Remember, Bajaj Markets offers a range of secured credit cards to suit different needs.
- Maintain a good repayment history: Pay your bills on time, every time. Late payments not only hurt your score but also attract hefty charges.
- Use your card wisely: Don’t max out your credit limit! Keep your utilization ratio (the percentage of your credit limit you use) below 30% for optimal score growth.
- Be patient: Building good credit takes time. Use your secured card responsibly for at least 6-12 months to see significant improvement.
Remember, a secured credit card is not a magic wand, but a stepping stone. Use it with discipline, make responsible choices, and watch your credit score soar, unlocking a world of financial possibilities
