De-jargoned: Secured credit card

A credit card can be used to improve one’s credit score. Paying your card bills in full and on time can help you improve your score. However, not everyone will be eligible for a credit card, especially those who have never taken credit before or those with poor credit history. In such cases, banks offer secured cards, which can be used to establish, or even re-establish one’s credit footprint.

WHAT ARE SECURED CARDS?

These are cards that use a fixed deposit (FD) you create with the bank as collateral. In a regular card, the bank will set your credit limit based on spends, payment history or income. In a secured card, the limit is set as a percentage of the amount in the FD.

Once you apply for the card, the amount in your FD will have a lien marked on it till you give the card back to the bank. Generally, banks will offer credit limit that’s 80-85% of the FD’s value.

The amount in the FD can be 16,000-6 lakh; varies across banks. Say, you have an FD worth 1 lakh and the bank allows for a credit limit of 80%, your credit limit will be 80,000.

The card holder can use the card like any other credit card. But an advantage it offers is that the rate of interest is usually lower than that of a regular credit card, which are unsecured. Interest rates on regular cards can be 1.99% a month (23.88% annually) to 3.5% a month (42% a year) depending on the type of card. For secured cards, depending on the bank, the interest can be 1.6% per month (19.2% per annum) to 2.5% a month (34.49% a year), or more. For instance, ICICI Bank Ltd’s Credit Card against FD charges a monthly interest rate of 2.49% (29.88% a year), while an unsecured card like its Coral credit card charges a monthly interest rate of 3.4% (40.8% a year).

If you don’t pay the due amount, the bank has the right to liquidate the FD and recover the money. The interest-free period or grace period to pay is 48-60 days. For unsecured cards, it is 20-50 days. In the ICICI Bank cards mentioned above, interest-free period for the secured card is 60 days, while it is 18-48 days for the regular card.

The know-your-customer (KYC) requirement, too, is lesser. The bank will not check your repayment history or credit score, and it does not ask for additional proofs, such as income, address and identity. The bank only requires you to have an FD with it.

WHAT SHOULD YOU DO?

These credit cards can be beneficial for those who have just started working and have enough cash to open an FD. Even those who are asset rich, like retired people who have a lot of money invested in FDs, but do not have enough regular income to meet the bank’s standards can apply for such cards.

Remember that though these cards are more easily available, they are offered against your FD. Not paying the bill on time will mean losing the FD. Also, no matter how low the interest rates on these cards may be, they can compound to high levels. So, not paying the full bill can still lead to a debt trap. Understand the card before opting for it.