There has been growing awareness about credit cards in India, but the number of users still remains low, with 118.6 million credit cards issued as of end-March, a penetration of only 8.5%. This is because of strict credit appraisal processes that leave a large segment of the population underserved.
In such a scenario, customers can opt for a secured or fixed deposit (FD)-backed credit card instead of the ubiquitous unsecured card. Secured cards not only provide similar benefits as unsecured cards, including reward points, lounge access, discounts, cashbacks, lifestyle perks and welcome vouchers, but also offer comparatively lower joining and annual fees.
Why credit card applications are rejected
Low/No credit history: New-to-credit individuals, including Gen Z (born 1997-2012), don’t have a credit repayment history. This makes it difficult for banks to evaluate an applicant’s risk profile, and they often reject the application.
Income limitations: Most traditional banks require proof of steady income to determine if applicants can afford credit cards. Many new-to-credit applicants such as students, self-employed individuals and freelancers don't have a regular source of income, making it rather difficult to get approvals.
Age restrictions: If an applicant is below 21 or above 65, most lenders will deny them a credit card. It is significantly harder for such individuals to get a card without an eligible co-signer.
High debt: Applicants with existing student loans, business loans or other such obligations can find it hard to access credit facilities.
Location: Banks restrict issuing cards to customers in tier-3 or 4 locations primarily because of the prohibitive cost of collection. Also, distribution networks are not as strong in far-flung areas.
What is a secured card?
Secured credit cards are issued against an FD placed with the issuing bank. The FD acts as collateral, reducing risk to the lender and providing easy approval to people with zero or below-par credit history or lower income, or those who don’t meet any of the various eligibility criteria. The credit limit on these cards is generally 75% to 90% of the FD.
Getting a secured credit card is not only simpler but it also helps users inculcate a sense of financial discipline and establish a reliable credit score over time. Armed with a minimum credit score of 750 and a stable income, an unsecured credit card is well within reach.
How are secured credit cards beneficial?
Secured credit cards are a viable financial option for people with low income such as young adults, students and self-employed individuals. The secured card application process is now 100% digital and totally paperless.
The card helps individuals to build a credit history as long as credit utilization remains below 30% and the entire outstanding amount is paid prior to the due date. Parallelly, the deposit made with the bank doubles up as an emergency fund and earns interest.
Develop a forward-looking credit history
Taking baby steps is a good idea – use your card for small monthly expenses like buying groceries, paying utility bills, OTT subscriptions and gym memberships. Pay your credit card bills in full and on time every month.
Your credit score will start building within a few months of card usage. Over time, you will build a strong credit history and an acceptable score that can easily get you approved for unsecured credit cards and even loans.
Who can avail of secured credit cards and how?
To avail of secured credit cards, you must be aged at least 18 and have an FD account with the issuing bank. The lender will need KYC documents such as Aadhaar and PAN card to speedily approve your facility.
Once the card is operational, you will receive monthly statements that list out your card transactions and end-of-period balances. To avoid expensive penalties, pay your bills on time.
Financial inclusion
A significant portion of India’s fast-growing and aspirational youth lives in tier-3 and 4 towns, which are densely populated by self-employed individuals across diverse age brackets. This grouping is typically outside of the established financial system. FD-backed cards offer a stellar opportunity for this somewhat neglected segment to be brought into the mainstream.
If you are new to credit or have a low credit score, secured credit cards offer a great path to build a credit score and establish creditworthiness. It is an ideal way to demonstrate responsible financial behaviour for those who have thus far lacked credit access.
Once you have built a reliable track record with regular payments, you become eligible for unsecured credit cards and also gain access to other loan categories, that too on better terms and with long-term benefits.
Raj Khosla is founder & MD of MyMoneyMantra