Secured credit cards: How do they work, are they a good bet for those with a bad credit score?

What would you do when you don’t have a credit history or a bad one and intend to procure a credit card? More likely than not, your credit card application will get rejected. But as they say — there is always a light at the end of the tunnel for the optimists. Such applicants can go for secured credit card wherein a credit card is issued against a cash deposit that works as a collateral.

This means if you have opened a deposit of ₹5 lakh, then you will be entitled to a secured credit card of equivalent amount. You can use this credit card wisely, build a good credit history that will make you eligible for an unsecured credit card at a later stage.

So, let us take one thing at a time.

What is a secured credit card?

A secured credit card is a card offered against the collateral or security of money. The cash deposit is security that can be used in case the user defaults on credit card payment. The limit of credit card same as the amount of security. Someone who gives a security of, say, ₹3 lakh is issued a credit card of equivalent amount. This is primarily seen as a precursor to procuring an unsecured, or a regular credit card.

Who should opt for it?

As mentioned above, this card should be opted for by someone who either does not have a credit history, or a bad one because of some financial difficulties.

So, a secured credit card is meant for the following users:

A. Someone who has started to earn or is a student. The only option for such a person to get a credit card is to get a secured one.

B. A person who faced some serious financial difficulties in the recent past because of which he could not live up to financial obligation, thus impacting his credit score adversely. Therefore, he is not eligible for a regular credit card as  of now. The only option for such a person is to opt for a secured credit score.

What are the key features of a secured credit card?

A. Security deposit: A secured credit card carries a security amount which is equivalent to the credit limit of card.

B. Building a credit score: This card is typically used as a stepping stone for someone with no credit history to build one by using the credit card in a disciplined and sincere way.

C. Like a regular credit score: The secured credit card is like a regular credit card. There is no difference in the way a bill cycle runs, payments are made and interest & penalties are levied.

D. Upgrading to an unsecured card: The usage of a secured credit card in a disciplined fashion leads to building of credit history, thus helping the user to become eligible for an unsecured credit card at a later stage.