Don’t have a CIBIL score? Here’s how a secured credit card can help you build it

A secured credit card is issued against the security of an FD. When you use it regularly and pay the monthly bills on time, you can build a good CIBIL score over a period of time.

Gopal Gidwani
First Published19 Jun 2024, 01:54 PM IST
Secured credit cards are issued against fixed deposits to help individuals without a credit score or with low income.
Secured credit cards are issued against fixed deposits to help individuals without a credit score or with low income.

Banks offer two categories of lending products: secured and unsecured. A credit card usually comes under the "unsecured loans" category. So, to get a credit card, you must meet the eligibility criteria, which include a good CIBIL score (750 and above), income, and other parameters. But what if you are new to credit and don't have a credit score? In such a scenario, you can take a secured credit card. Let us understand what a secured credit card is and how it can help you build a CIBIL score.

Also Read: Seeking a loan with a poor CIBIL score? Here are 3 key tips to help you secure funds

What is a secured credit card?

It is a type of credit card issued against the security of a fixed deposit. If you don't have a CIBIL score, you can open a new fixed deposit or offer an existing fixed deposit and ask the bank to offer you a secured credit card against it.

The credit limit issued against a secured credit card depends on the fixed deposit amount. A bank usually offers a credit limit equivalent to 75% to 90% of the fixed deposit amount. Some banks may offer a credit limit higher than this.

The bank keeps the credit limit in this range so that the customer’s spending using the credit card is restricted. The minimum FD amount requirement for the issue of a secured credit card may differ from bank to bank.

Secured credit cards are useful for people who don’t have a credit score or a low credit score. They are useful for people with no income or low income. For example, students or homemakers can go for a secured credit card as they don’t have an income source.

Also Read: How does a pre-approved loan influence your CIBIL score? MintGenie explains

What happens to the fixed deposit offered?

The bank marks a lien on the fixed deposit against which the secured credit card is offered. As a result, you will not be able to withdraw the fixed deposit amount (partially or fully) till you hold the credit card. To withdraw the FD amount, you first need to close the credit card.

When the fixed deposit matures, it is automatically renewed. The tenure is the same as the earlier one, and the interest rate is the prevailing rate at the time of renewal.

Getting approval for a secured credit card is easier than getting an unsecured credit card or loan, as the bank has the FD as collateral.

Also Read: CIBIL score on a decline? 6 key steps to follow to improve it

How does a secured credit card help you build a CIBIL score?

Once you get the secured credit card, you can use it for regular expenses like grocery purchases, utility bill payments, medical expenses, online shopping, dining, etc. Once the monthly bill is generated, make sure you pay 100% of the amount on or before the due date. When you repeat the process every month, your CIBIL score builds over time.

An important point to note is that if you fail to pay the monthly bill by the due date, the bank can recover the money from the fixed deposit offered as security. It is one of the reasons why the bank restricts the credit limit up to 100% of the fixed deposit so that it doesn’t incur losses on non-repayment of the credit card bill.

Please note that timely repayment of the monthly bill is one of the parameters for calculating the CIBIL score. The other parameters include a low credit utilisation ratio, the ageing or duration of credit line(s), the number of credit accounts and the mix of secured and unsecured credit, the number of credit applications and their frequency, etc.

Also Read: How to prevent impact of frauds on your CIBIL score? Here are 5 steps

Secured credit cards help repair and rebuild the CIBIL score

Apart from helping first-time borrowers build a CIBIL score, a secured credit card also helps people who have defaulted in the past to repair and rebuild their credit score. If you have defaulted on any loans or credit card repayments in the past, it hits your CIBIL score and spoils your credit history. In such a situation, any bank would hesitate to give you a credit card or any other unsecured loan. In such a scenario, a secured credit card can come to your rescue.

You can take a secured credit card to repair and rebuild your CIBIL score. You can use the card for your regular expenses and make timely repayments. With timely repayments, a lower credit utilisation ratio, and other parameters, your CIBIL score will improve over a period of time.

Also Read: From lower interest rates to strong bargaining power, 5 long-term benefits of high CIBIL score

Benefits of a good CIBIL score

With regular usage and timely bill payment of your secured credit card, you can build a good CIBIL score over a period of time. Once you build a credit score of 750 or above, you can apply for credit cards and loans based on your credit score, income eligibility, and other parameters.

The higher the CIBIL score, the better. A good CIBIL score can make you eligible for loans. Some financial institutions may offer you loans at lower interest rates and other favourable terms, basis your good CIBIL score.

Banks that offer secured credit cards

Some of the banks that offer you secured credit cards include the following.

a) IDFC FIRST Bank: The bank offers the IDFC FIRST WOW! Credit Card as a secured credit card against the security of a fixed deposit. You can get a credit limit equal to 100% of your FD value. It is a lifetime free credit card with no joining fee and no annual fee.

b) ICICI Bank: ICICI Bank offers two secured credit cards: Instant Platinum Chip Credit Card and Coral Credit Card against FD. The Instant Platinum Chip Credit Card can be availed against a minimum FD amount of Rs. 50,000. It is a lifetime free credit card.

c) Kotak Bank: The bank offers the Kotak811 Dream Different Credit Card. It is a lifetime free credit card. The minimum FD amount should be Rs. 5,000. The credit limit offered is up to 90% of the FD amount. Please note that the RBI has barred Kotak Bank from issuing any new credit cards till further notice.

Apart from the above, other banks also offer secured credit cards.

Secured cards for credit novices

Are you someone who doesn't have a CIBIL score, or has a low CIBIL score, or wants to repair and rebuild your credit score? In all these scenarios, a secured credit card can be your saviour. Along with helping you build a good CIBIL score, it can provide you with benefits like instant discounts, reward points, and other benefits. Usually, these cards are either lifetime free or have a nominal fee. Thus, a secured credit card can be your gateway to building a healthy credit score and enjoying the other benefits of a credit card.

Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.

 

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First Published:19 Jun 2024, 01:54 PM IST
HomeMoneyPersonal FinanceDon’t have a CIBIL score? Here’s how a secured credit card can help you build it

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