One of the most important financial factors that banks and NBFCs examine when granting you credit cards, personal loans, house loans, and other financial products is your credit score. In plain English, your credit score is a numerical assessment of how effectively you handle your debts. If your credit score is high, it will be easier for you to get loans and credit cards.
A credit score of 750 or higher is typically seen as good, while those with lower scores are typically less eligible. Additionally, some lenders charge customers with poor credit scores higher loan rates. Those who already have loans or credit cards can raise or build their credit score by making on-time payments and engaging in other credit-friendly behaviours. However, for people who don’t already have any debt, getting a new loan to raise their credit score might not be a good option because they would have to pay interest.
For many people, getting regular credit cards to raise their credit ratings may be challenging because banks no longer approve credit cards for people who are “new to credit” or have low credit scores. Additionally, other obstacles may prevent you from getting standard credit cards, such as insufficient income, geographic restrictions, ineligible employment or employer profiles, etc. Getting a secured credit card would be the wisest course of action for such people.
How do secured credit cards work?
Unsecured and secured credit cards are similar; the main distinction is that a fixed deposit opened with a bank is used as collateral for secured credit cards. Since the bank has placed a lien on these FDs, they cannot be closed until the owner gives up his secured credit card. However, in the case of a default, the issuer bank may close the FD(s). Due to the almost complete lack of credit risk, secured credit cards are now available to almost everyone, regardless of their credit score or what they do for a living, how much money they make, or where they live.
Credit cards with FD provide reward points, discounts, gift cards, and other benefits on credit card transactions, just like ordinary credit cards do. Also, these cards have a grace period when you don’t have to pay interest on purchases. However, you have to pay finance fees if you don’t pay your bill in full by the due date.
People who are in school, recently graduated, stay-at-home moms, or who have bad or no credit can apply for secured credit cards and earn rewards on them. With these cards, you may continue earning interest on your pledged FD while improving your credit score.
Guidelines for enhancing your credit score with secured cards
Credit card issuers provide credit bureaus with data on missed or delayed credit card payments. When these bureaus include such information in your credit report, your credit score is subsequently affected. The issuers will, however, view the prompt payment of your credit card balance as a favorable attribute, and credit reporting agencies will gradually raise your credit score. So, it’s best to always use your credit card as if it were a debit card and only charge what you can comfortably pay back by the due date on your statement.
Let us go over some tips for improving or raising your credit score:
- First, pay off your credit card by the deadline.
- If you cannot pay your debts by the due date, convert them into EMIs.
- Do not obtain multiple secured or unsecured credit cards quickly.
- The typical credit limit is between 70% and 80% of the deposit. So when you’ve used up 75% of your credit limit, increase your limit.
- Regularly monitor your credit score; if anything seems off, report it to the credit bureau and the relevant bank so they can fix it. A credit score that has been corrected may be higher.
These are the things to consider before applying for a secured credit card.
Make sure the secured card you select has the best offer for what you need, and keep an eye on the credit card’s terms and conditions. To make the most of the secured card, consider the following issues before applying:
- The fixed deposit’s size, term, and interest rate
- Top deals that fit your criteria for obtaining the card.
- Credit limit: As the amount of the FD grows, so does the credit limit.
- Finance fees and ongoing credit (charged when you fail to clear dues before the due date)
- Review the details regarding joining, annual, or renewal fees.
- Make sure the value of your card is greater than any other fees, such as joining or annual fees.
Other Advantages of a Secured Credit Card
- Your secured credit card’s liens on FDs continue to generate interest for you.
- This helps you access money without prematurely closing your fixed deposit, increasing your liquidity.
- Secured credit cards have much higher approval rates than unsecured ones, which aids in improving credit scores for people with no credit history or low credit scores.