5 reasons why you should consider a secured credit card

If you are focused on building your credit history while still enjoying the comfort of regular credit card usage, a secured credit card can be of immense help. These credit instruments are backed by collateral such as fixed deposits, providing holders and lending institutions with safety and peace of mind.

Secured credit cards can help borrowers establish consistent and clean repayment profiles, thereby boosting their credit scores.

I. Build or repair your credit

A secured credit card backed by a fixed deposit can help you rebuild your credit history. Regular, timely payments boost your credit score, improve your profile, and make future loan approvals easier. Lending institutions generally prefer applications with credit scores of over 750 or applications secured with a reputable collateral, such as a fixed deposit, gold, property, etc.

II. Easier approvals and broader access

As this credit card is secured in nature, i.e., backed by collateral, due to the same, the approval criteria are more lenient and accommodating than for unsecured credit cards. Even individual borrowers with a weak credit profile and a low credit score can qualify for such credit cards easily, provided they can meet the collateral requirements.

III. Controlled spending and financial discipline

With the ongoing festive rush, it is easy for credit card users to get carried away due to the various offers presented to them. Still, in the case of secured credit cards, the credit limit is tied to one's fixed deposit. This puts automatic restrictions and, on a fundamental level, encourages responsible credit card usage.

This setup helps avoid overspending and emotional rush, thereby fostering proper debt management, a key factor in ensuring long-term financial stability.

IV. Security and low risk

It would be better to use a secured credit card than carry cash or debit cards for day-to-day expenses. This way, the user remains digitally secure. Especially thanks to the strict regulations and guidelines introduced by the Reserve Bank of India on ways to properly use credit cards.

V. Rewards and future upgrades

To further promote the idea of secured credit cards and boost financial inclusion in the country, there are banks that offer reward points, cashbacks, perks, along with other benefits that are available to regular credit card holders. Consistent and responsible usage can help users secure premium credit cards and personal loans on easier terms and conditions as their financial condition improves.

In an era where credit reputation matters, secured credit cards combine safety, convenience, and reliability, making them a smart step towards healthier personal finance. Still, before going ahead with any particular secured credit card, one should take into account the associated risks.

What are the risks associated with secured credit cards?

1. If one defaults on secured credit card payments, then it can result in a loss of collateral. As the bank in such cases will confiscate the collateral pledged by the credit card holder, as per the norms and rules of the initial contract.
2. Missing loan EMIs, or due dates can result in attracting high interest charges. This is something similar to what happens with regular credit card holders if they default on payments.
3. Processing costs, annual charges, and late payment fees can result in reducing the overall benefits of using a secured credit card if the card-related terms and conditions are not understood carefully.
4. Missing due dates, irregular payments can still hurt your credit score and damage your credit profile, even after the collateral security.

Therefore, one should only go ahead with secured credit cards after proper due diligence and consultation with a certified financial advisor.

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Disclaimer: Mint has a partnership with fintech companies to offer credit; you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article aims to educate readers and raise awareness about the essential needs for credit, including loans, credit cards, and credit scores. Mint does not promote or encourage taking credit, as it comes with risks such as high interest rates and hidden charges. We advise investors to discuss with certified experts before taking any credit.