Are you looking to build a credit history? But you need a credit history/score to get a credit product that can help you build a credit history. This can make it difficult for a lot of individuals to build or rebuild a credit history.
Building a credit history or having a good credit score is important and it impacts everything from loan approvals to interest rates and even employment prospects. However, building or rebuilding credit can be challenging, especially for those who are new to credit or have faced financial setbacks. This is where a secured credit card can be a game-changer.
A secured credit card offers a practical and controlled way to establish or repair credit. In this article, we'll explore how secured credit cards work, their benefits, and how to use them effectively to create a solid credit foundation.
A secured credit card functions much like a traditional credit card, but with one key difference: it requires a fixed deposit. This deposit serves as collateral for the card issuer and typically determines your credit limit.
For example, if you provide a ₹50,000 FD, your credit limit will usually be set at ₹45,000. This reduces the lender's risk, making secured credit cards an accessible option for individuals with no credit history or those rebuilding from past financial challenges.
A secured credit card offers several benefits for anyone looking to build or rebuild credit:
Using a secured credit card responsibly is key to maximizing its benefits. Here's how to make the most of it:
Choose the right secured card: Not all secured credit cards are created equal. When selecting one, consider:
Choose the right FD: It would be better to get a secured credit card against an FD with a high maturity value as your credit limit will be based on your FD. It is because if you have a higher credit limit, it would be easier to keep the credit utilisation ratio low.
The credit utilisation ratio is nothing but the proportion of the credit that you have used out of the credit that was available to you. For instance, if your credit limit is ₹50,000, then spending Rs.25,000 will bring your credit utilisation ratio to 50%. However, if your credit limit is ₹1 lakh, your credit utilisation ratio would have dropped to a healthy 25%.
Use your card wisely: A secured credit card isn't a tool for large purchases.
Instead:
Pay on time, every time: Timely payments are crucial, as payment history accounts for 35% of your credit score. Set reminders or automate payments to ensure you never miss a due date.
Monitor your credit progress: Many card issuers provide free credit monitoring tools. Regularly checking your credit score helps you track improvements and address potential issues quickly.
Transition to an unsecured card: Once you've built a history of responsible use, some issuers will allow you to upgrade to an unsecured card, often refunding your deposit. This is a significant milestone in your credit journey.
Using a secured credit card responsibly can help establish or improve your credit score. This happens as the issuer reports your positive activity to credit bureaus, impacting key credit factors:
A secured credit card is more than just a financial tool; it's a stepping stone toward achieving your financial goals. Whether you're starting from scratch or recovering from past financial mistakes, using a secured card responsibly can pave the way for better credit opportunities.
Padmaja Choudhury is a freelance financial content writer. You can reach out to her at padmaja@padmajachoudhury.com.
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