Secured credit cards: How do they work, and are they a good bet for people with bad credit scores?

What should you do if you have no credit history or a bad one and intend to get a credit card? In this case, more likely than not, the chances are that your credit card application will get rejected. However, there is still hope. You can apply for a secured credit card, which is issued against a cash deposit that works as collateral.

This means, for example, if you open a deposit of ₹5 lakh, you will be entitled to a secured credit card with a limit equivalent to that amount. By using this credit card responsibly, you can build a good credit history, eventually making you eligible for an unsecured credit card at a later stage.

So, let us take one thing at a time.

What is a secured credit card?

A secured credit card is offered against the collateral or security of money. The cash deposit is a security that can be used in case the user defaults on credit card payment. The limit of the credit card is the same as the amount of security. Someone who gives a security of ₹3 lakh is issued a credit card of an equivalent amount. This is primarily seen as a precursor to procuring an unsecured or regular credit card.

Who should opt for it?

As mentioned above, this card should be chosen by someone who either has no credit history or has a bad one because of some financial difficulties.

So, a secured credit card is meant for the following users:

A. Someone who has started to earn or is a student. The only option for such a person to get a credit card is to get a secured one.

B. A person who faced some serious financial difficulties in the recent past, because of which he could not live up to financial obligations, thus adversely impacting his credit score. Therefore, he is not eligible for a regular credit card. 

What are the key features of a secured credit card?

A. Security deposit: A secured credit card carries a security amount which is equivalent to the credit limit of the card.

B. Building a credit score: This card is typically used as a stepping stone for someone with no credit history to build one by using the credit card in a disciplined and sincere way.

C. Like a regular credit score: The secured credit card is like a regular credit card. There is no difference in the way a billing cycle runs, payments are made, and interest and penalties are levied.

D. Upgrading to an unsecured card: The usage of a secured credit card in a disciplined fashion leads to the building of credit history, thus helping the user become eligible for an unsecured credit card at a later stage.