Credit card issuers take various eligibility parameters into consideration while evaluating credit card applications, including the applicant’s credit score, monthly income, employer’s profile and job profile. Failure to meet the cut-offs assigned by card issuers can lead to rejection of credit card application.
Secured credit cards can be a great alternative for those who are unable to get regular credit cards. But before we dive into the pros and cons associated with a secured card, let’s first understand what secured credit cards are, and how they differ from regular credit cards.
What are secured credit cards?
Banks issue secured credit cards against the collateral of fixed deposits. The credit limit is assigned on the basis of the value of the pledged fixed deposits. Banks usually extend credit limit equal to 80-90 per cent of the total fixed deposit amount.
Apart from the collateral, most of the other features of secured credit cards are similar to that of regular credit cards. Just like regular cards, secured cards also offer reward points, discounts, vouchers, etc on credit card’s transactions. They also offer interest-free period on credit card spends and levy finance charges on non-repayment of credit card bills by the due date.
What works in favour of Secured Credit Cards?
Relaxed eligibility criterion: The availability of fixed deposits as collateral allows banks to liquidate fixed deposits to recover outstanding dues of the card holders. This eliminates the credit risk for banks, thereby allowing them to ignore usual eligibility conditions such as the applicant’s income, credit score, location, employer’s profile and job profile.
Helps to build and/or improve credit history: Just as in case of regular credit cards, banks report transactions made through secured credit cards to credit bureaus. These transactions are then factored in by the bureaus while calculating credit score. Hence, those who are denied regular cards due to low or no credit score can opt for a secured credit card and use it to improve their credit score. A good credit score would ultimately improve their loan and regular credit card eligibility prospects.
Earn interest on the pledged FD: Fixed deposits pledged for availing secured credit cards continue to accrue interest component till its maturity. Opting for a secured card is similar to availing a loan against fixed deposit or other fixed income securities wherein the pledged underlying investments continue to earn interest while being leveraged as security for availing additional funds.
Higher capital efficiency for the card holder: Secured credit cards allow users to easily access funds for mitigating short-term liquidity mismatches, without closing their fixed deposits prematurely. This saves them from incurring premature withdrawal penalty, if levied by the banks, and from incurring opportunity cost in the form of sacrificing higher FD interest rate due to premature withdrawal. This leads to higher capital efficiency for the card holders, especially for those facing frequent liquidity or cash mismatches.
What can work against Secured Credit Cards?
Absence of diverse choices vis-a-vis regular credit cards: The primary drawback of secured credit cards is the absence of diverse card options available on regular credit cards. In case of regular credit cards, card issuers usually offer multiple card options like travel cards, fuel cards, reward cards, premium credit cards, cash back cards, co-branded shopping cards, and so non.; each of which are aimed for specific customer and spend types. In case of secured credit cards, banks usually offer one or two card variants with generic benefits.
FD withdrawal not permitted until the closure or expiry of the secured card: Secured card holders are not allowed to close their pledged fixed deposits until their secured credit cards are closed or reach expiry date. Hence, those planning to avail secured credit cards should only pledge those fixed deposits as collateral which they can do without till its expiry. Never pledge the fixed deposits allocated towards emergency funds or other crucial financial goals as collateral for availing secured credit cards.
The author is Senior Director, Paisabazaar.com
DISCLAIMER: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.