If you have a stable monthly income, an ideal debt-to-income ratio, decent credit history and the associated credit score, then you have a fair chance of getting a credit card without any hassle. In fact, the card issuers will be behind you to provide you with a credit card.
What if you’re in a contrasting scenario – you don’t have stable income, no/poor credit history or credit score or high on debit, etc. No issuer would come forward to offer you any credit card or a loan.
In both the cases, if we say that you can get a credit card, would you believe it? Of course, you should, and we will tell you how.
If you’re in the first scenario, with a clean financial record, you would be offered an unsecured credit card. Unfortunately, if you’re in the second situation, you will still be offered a credit card, a secured one though that comes with some strings attached.
Let’s dig a little further to know the difference between secured and unsecured credit cards, how they work, and other things to consider while applying for one.
A secured credit card
As mentioned earlier, a secured credit card is designed to cater the group of people who frequently faces a rejection whenever they apply for a credit card. The reason could be lack of income or income proof, poor or no credit history/score, or any other.
A secured credit card, as the name implies, is a credit card issued on some collateral. Just like a secured loan, you need to produce some security to the card issuer to issue the card.
Banks and credit card issuers typically offer secured credit cards against a fixed deposit with them.
Open a fixed deposit and your secured credit card will be issued almost instantly. The banks usually fix a minimum amount that needs to be deposited in the FD account to avail the credit card.
You can get a secured credit card on a minimum deposit amount of Rs.10,000 also.
How Does Secured Credit Cards Work?
Secured credit cards work similar to any other credit cards. However, there are a few limitations in terms of credit card limit and other things.
The credit limit on secured credit cards is typically 75% to 85% of the FD amount. This means if you have a fixed deposit of Rs.1 lakh, you might receive a credit card with the total credit limit of Rs.75,000 to Rs.85,000. Thus, the higher your FD amount is, the higher would be the credit limit on your secured credit card.
Another reason why banks provide secured credit cards against FD is that they can consider the FD as a security deposit. In case, the cardholder defaults on the payments, the bank or the card issuer reserves all the rights to break the FD and utilise the funds to clear the pending dues on the card.
Advantages and disadvantages of secured credit cards
- Easy and quick approval: You walk-in to the branch to open a fixed deposit and you walk out with a credit card. No income proofs, no back ground checks, nothing. The same identity and residential proofs you have submitted to open the FD would be used for your credit card account as well.
- Re-establish your credit: Don’t worry if you had a bad credit score or no score at all. With a secured credit card, you can build or re-build your credit. Make sure to use the card within the limit and clear the dues on time. Maintain consistency in card usage as well as making bill payments to build your credit score quickly. Once you have a decent score, you may be able to apply for a secured credit card.
- Earn interest on your FD: While serving as a security deposit, the FD also accrues interest if it is placed in an interest-bearing account. Depending on the deposit duration, you can earn decent interest on your FD.
- Low or no annual fee: Many banks in India issue secured credit cards that come with a low or no annual fee. Even the minimum fixed deposit required is as less as Rs.10,000 making the cards a feasible option.
To quote an example, SBI Unnati Credit Card is a secured card that is offered free for the first 4 years. YES Bank’s Prosperity Rewards Plus Credit Card?has an annual fee of Rs.350.
Some of the drawbacks include
- Lack of funds: Unless you have the minimum amount to open the FD, you cannot avail a secured credit card. The same funds can be used to repay any outstanding debts. Saving some money each month would help you collect funds for the FD and thereby to apply for a secured credit card.
- Less spending limit: As the credit limit on secured credit cards typically depends on your fixed deposit amount. The lesser the amount you deposit, the lesser would be your spending limit on the card.
- Money remains locked: Until the credit card issuer gets convinced that your credit card account is good enough to get converted into a regular account, the FD amount remains locked with the bank. You cannot use the money nor can you withdraw the same without closing your credit card account.
Difference Between Secured Credit Cards and Unsecured Credit Cards
As we have discussed enough about secured credit cards let’s see how they differ from unsecured credit cards.
- The main difference between secured cards and unsecured cards is the basis on which they’re being issued. While secured cards need a collateral for approval, regular cards are issued based on income, credit history and credit score of the applicant.
- Application process, document collection, background verification are the other factors that vary for both the cards.
- Credit card limit is another differentiator. While it depends on the amount of fixed deposit for secured credit cards, for regular cards, it is calculated based on the applicant’s eligibility.
- The features offered on both the cards, however, remain almost the same, based on the card variant. The premier the card, the better would be the benefits.
Which is better – Secured Credit Card or unsecured?
Well, secured and unsecured credit cards are two different credit cards designed to cater different set of customers.
While the regular customers serve the needs of eligible credit card applicants, the unsecured cards are for those who often don’t qualify for a regular or unsecured credit card.
Hence, while making a choice between both the cards, one must consider his own requirement and eligibility factors rather than anything else.
If you have a clean credit record and a good credit score, then there is no point to put some amount in a fixed deposit and then to get a credit card.
Similarly, if your credit history is in bad condition or if you’re availing a credit facility for the first time, it’s ideal to go for a secured credit card as it allows you to build or re-build your credit history while enjoying the credit card facilities.