Secured credit cards: What they are and when you should get one

Have you ever encountered someone who is ineligible for a credit card because they have a poor or nonexistent credit history and needs to build credit? Or does the applicant have an income that is lower than the minimum eligibility criteria for the card?

Well, this is not unusual. In such cases, banks tend to offer a secured credit card. For those who are not aware, secured credit cards are offered against the collateral of a fixed deposit (FD) that is opened in the same bank.

Suppose Ajay is not eligible for a credit card because he does not have a job. The bank has now offered him a secured credit card with a credit limit of ₹5 lakh, which requires him to open a fixed deposit of the same amount with the bank.

As he uses the card and clears his bills on time, his credit score will gradually improve, thus enabling him to apply for a regular credit card at a later date.

If he fails to settle his bill, the bank will be able to use the money deposited in a fixed deposit towards the credit card payment.

Some examples of secured credit cards:

I. SBI Card Unnati: This zero-fee card can be opened with a lien on the cardholder's fixed deposit opened with SBI of ₹25,000 or more.

II. ICICI Bank's Coral Credit Card Against Fixed Deposit: This card can be issued against an ICICI Bank Fixed Deposit of ₹50,000 or more, with a minimum tenure of 180 days. A lien is marked on the fixed deposit, and 90 per cent of the amount of the Fixed Deposit is issued as a credit limit of the card.

You can consider a credit card in these scenarios:

1. No credit history: When you do not have a credit score because you don't have a history of bill payments and credit cards, you have no choice but to apply for a secured credit card.

2. Not eligible: Suppose you are not eligible for a credit card because your income is lower than the minimum requirement for the card. The bank, therefore, offers you a credit card that is secured against a fixed deposit. The amount of money deposited in the FD works as collateral.

3. Step towards a regular card: Sometimes, when you are unable to convince the bank to issue you a credit card for whatever reason, you can use a secured card as a step towards building your credit score. And once you have a good credit score, you can apply for a credit card at a later stage.

Therefore, we can say that secured credit cards are a good way for individuals with poor or no credit history to build their credit. Still, it is essential to clearly understand the risks associated with credit cards. The risks discussed are as follows.

5 risks of using credit cards

1. Carrying unpaid balances on your credit card can result in the accumulation of debt.
2. The easy availability of credit can cause the credit card holder to overspend. This can force them into a debt spiral.
3. Missing out on payments or maxing out on your credit card can damage your credit profile and lower your credit score.
4. Late payment fee, hidden charges, annual charges and foreign transaction fees can add up quickly and make holding credit cards expensive.
5. Credit card details can be stolen, and the loss of critical data such as OTPs, CVVs, etc., can result in financial fraud.

In conclusion, it can be stated that secured credit cards are a good tool to help new and upcoming credit card users to build a fresh credit profile. Still, one should proceed with a new credit card only after conducting thorough due diligence and consulting with a certified financial advisor.

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Disclaimer: Mint has a tie-up with fintechs for providing credit; you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards, and credit scores. Mint does not promote or encourage taking credit as it comes with a set of risks, such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.