Photo: iStock
Photo: iStock

You can get a secured credit card from a bank and use it to build a good credit score

To get a secured credit card, you have to create a collateral, typically a fixed deposit, with the bank

Having a good credit score and history is important these days. These enable you to buy things that cannot be purchased upfront. Those who need this privilege the most are the ones who are new entrants to the job market. However, they usually don’t have a credit score. There has been some good news for them in these last few years, in the form of alternative data from sources such as your social media, bill payments and transactional history being used to determine the creditworthiness of individuals who don’t have a traditional loan-based credit history.

The bad news is that while financial institutions as well as credit bureaus are experimenting with alternative data, it is not being used as the primary method of assessing creditworthiness.

At best, fintech companies are using it to extend pay-day loans of small sizes. Therefore, for new employees to build a credit history and score, experts agree that credit cards are a better option than depending on the alternative methods of assessing creditworthiness.

And a credit card is not too difficult for this group of people. If you are a salaried individual, in all likelihood the bank having your salary account would give you a credit card, even if with a low credit limit, to begin with. However, if your work involves receiving irregular cashflow, you may find it difficult to get a credit card. For this group of people, getting a secured credit card is a good option.

In a normal credit card, the issuing bank takes a risk on your credit limit. In a secured credit card, the bank takes measures to secure that risk.

To get a secured credit card, you have to create a collateral, typically a fixed deposit, with the bank.

In a regular credit card, the bank will set your credit limit. In a secured card, the limit is set as a percentage of the amount in the fixed deposit. Generally, banks will offer a credit limit that is around 80% of the fixed deposit’s value. For instance, ICICI Bank Ltd offers the Coral credit card—in which against a minimum fixed deposit of Rs20,000, you can get a credit limit of 85% or Rs17,000.

The cardholder can use this card like any other credit card. If you don’t pay the due amount on time, the bank has the right to liquidate the fixed deposit, including the accrued interest. On the other hand, if you keep paying your credit card dues on time, you continue to earn interest on the fixed deposit.

With secured credit cards like this one, banks are less stringent about documentation. Unlike with a regular (unsecured) credit card where you would need to furnish proof of income, banks can issue the secured credit cards without income proof. A proof of identity and a fixed deposit with the bank is usually enough. Other banks like the State Bank of India and Axis Bank Ltd also offer secured credit cards.

Having a good credit history is useful because it facilitates ease of borrowing. A good credit score also improves your bargaining ability with institutional lenders, to get more favourable interest rates when you are looking for big-ticket loans to finance your home or a vehicle.

If you are unable to get a regular credit card but have the cash to open a fixed deposit, these credit cards can be used as a good way of building a conventional credit score.

However, remember that even if these cards are available more easily, they are being offered to you against your fixed deposit. Your diligence in paying back the dues of a secured card cannot be any different than that of an unsecured card.

Not paying the bills of these credit cards on time will not just mean loss of the collateral fixed deposit, it will also harm the very credit score and history that you may have been trying to build—and may even land you into a debt trap.