What Are Secured Credit Cards and Why Are They Beneficial to People with Adverse Credit Scores

by MyMoney Mantra FinTech (Financial Technology)

What is the most critical factor that decides whether or not you will get a Credit Card? Yes, you have guessed it right. Your credit score is the defining factor for the issuance of a Credit Card. If you have a good credit score in the range of 750 and above, there should be no problem for the bank or the Credit Card issuer. However, people who do not have good credit scores can find it difficult. They have a beautiful option called Secured Credit Cards. We will discuss the concept of secured Credit Cards and see why they are beneficial to people with adverse credit scores.


What are secured Credit Cards?

A secured Credit Card is a Credit Card backed by collateral in the form of a fixed deposit receipt with the bank.


What is the difference between a secured Credit Card and the standard Credit Card?

Usually, Credit Cards are unsecured loans. You do not have to provide any collateral to your bank. The Credit Card issuer offers Credit Cards based on your income, repaying capacity, and credit score. In case of a secured Credit Card, you give collateral in the form of fixed deposits.


The rate of interest on Credit Card outstanding balances is usually 1% more than what the bank pays to the customer on his fixed deposits.


The concept of secured Credit Cards

People having an adverse credit history or those with no credit history at all find it difficult to get Credit Cards. These people might have the money as well as the repaying capacity, but their adverse credit history prevents the bank from issuing the standard Credit Cards to them.


Such people can develop or improve their credit history by using secured Credit Cards. Some banks issue cards to their account holders against lien on their fixed deposits with them. These banks offer around 80% to 90% of the fixed deposit amount as the Credit Card limit. For all practical purposes, these secured Credit Cards are similar to the standard ones. They have the same features, such as the concept of minimum payment due, rewards point programme, and cash advance facility, and so on.


The users of the secured Credit Cards have to make regular payments on or before the due date. In case of default of payment, the bank has the right to appropriate the fixed deposit amount towards satisfaction of the Credit Card dues. If you make the regular payments, the fixed deposit remains intact. You continue to earn interest on the fixed deposits.


What is the benefit of using secured Credit Cards?

·       The secured Credit Cards are ideal for young people who do not have any credit history as they have never availed any loan from a bank. The proper use of the credit card helps them build up a credit history. They can apply for a secured Credit Card online by authorising the bank to have a lien on their fixed deposit receipt.

·         The secured Credit Card helps the younger generation as it teaches good financial habits. They learn to use the cards safely and responsibly.

·         People with adverse credit history can also benefit by using these secured cards. The banks do not conduct credit score checks while issuing secured cards because they have the collateral in the form of fixed deposit receipts. It is the most liquid form of collateral because the banks can proceed to close the deposit receipt and adjust the card dues at any time.

·         Such people can use these secured Credit cards in the way they use their standard cards. They have to make regular payments in these accounts. These periodic payments help in improving their credit score.


When can the bank exercise its right of lien?

The banks send the Credit Cards bills to the customer demanding the payment by the due date. In case the customer defaults in the payment, the banks can proceed to close the fixed deposit and adjust the Credit Card bill. In case of any excess, the bank credits the same to the savings account of the cardholder. There are no chances of any deficit because the banks usually maintain a margin of 10% to 20% of the fixed deposit amount.


How does it benefit the bank?

It is a valid question because the bank is lending money against the customer’s money. It has to pay interest to the customer on his deposit amount. The banks can charge interest on the card balances at 1% more than what they pay to the customer as interest on the fixed deposit.


Hence, it is a win-win situation for all parties as:

·   The banks increase their secured advances portfolio

·   The customers keep getting interest on the fixed deposit receipts even as they use the Credit Cards

·    The cardholders get the opportunity to improve their credit history

Also Read: How to Fly Smartly Using a Travel Credit Card?


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About MyMoney Mantra Freshman   FinTech (Financial Technology)

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Joined APSense since, September 22nd, 2017, From New Delhi, India.

Created on May 31st 2018 06:52. Viewed 1,119 times.


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