- 1 Secured Credit Cards:
- 2 How to Qualify for a Secured Credit Card
- 3 How Secured Credit Cards Work
- 4 Advantages of Secured Credit Cards
- 5 1. Can Qualify With Imperfect Credit
- 6 Read more what are native effect of credit score
- 7 2. May Improve Your Credit Score and Build Credit Over Time
- 8 3. Makes Certain Types of Transactions Possible
- 9 4. Deposits May Earn Interest
- 10 5. Everyday Spending May Earn Rewards
- 11 6. Low Credit Card Spending
- 12 7. Opportunity to Graduate to an Unsecured Card
- 13 Disadvantages of Secured Credit Cards
- 14 1. Usually Requires Some Credit History
- 15 2. Likelihood of Higher Interest Rates
- 16 3. Higher Fees
- 17 4. Relatively Low Spending Limits
- 18 5. You Usually Can’t Outspend Your Security Deposit Without Paying Off Your Balance
- 19 6. Credit Bureau Reporting Might Not Be Discreet
- 20 7. Potential for Damage to Your Credit Score
- 21 8. No Security Deposit Access Until Your Account Is Closed
Secured Credit Cards:
Secured credit cards are designed for three types of consumers:
1.Those with thin or nonexistent credit histories
2.people looking to build credit for the first time
3.people looking to rebuild credit
How to Qualify for a Secured Credit Card
Secured credit cards have much looser underwriting standards than most unsecured cards, especially premium cashback credit cards and travel reward credit cards with generous rewards programs, expansive lists of value-added perks, and high spending limits.
No-Credit-Check Secured Credit Cards
A few secured credit cards require no credit check at all. If they can scratch up the minimum required security deposit (more on that below), applicants are guaranteed approval. The catch is that no-credit-check secured cards tend to have higher annual fees, high APRs, restrictive terms, and no clear path to unsecured status.
Read –: Our list of tips to improve your credit score rating has more simple strategies to improve your credit score and build your credit profile over time.
How Secured Credit Cards Work
Secured credit cards have several common characteristics:
Security Deposits Held in Collateral Accounts: Secured credit cards are secured by a cash deposit held in a collateral account, usually a savings account with a token yield. Once your secured credit card application is approved, you’re required to make your security deposit before you can begin using your card. The minimum deposit amount usually ranges from Rs 20,000 to Rs 50,000.
Credit Limits depends Closely to Security
Secured credit cards’ initial credit limits are usually identical to the initial security deposit amount Some restrictive cards wall off part of the deposit – up to 50% so that a Rs 1,00,000 deposit begets a Rs 50,000 credit limit. Many issuers allow cardholders in good standing to raise their credit limits with additional collateral account deposits, with or without an attendant credit increase application.
Balance Payments: Like unsecured credit cards, secured cards require regular balance payments on a monthly schedule. Cardholders make these payments with cash on hand – not their security deposits, which remain untouched except in specific circumstances outlined below.
Credit Bureau Reporting: Secured credit card issuers generally report credit utilization and payment patterns to the three major credit reporting bureaus:. Before applying, review your cardholder agreement and disclosures to confirm that this is, in fact, the case for your issuer. Assuming your issuer does report, responsible use and timely payments can raise your credit score over time.
Higher APRs: With some notable exceptions, secured credit cards generally have higher APR ranges than unsecured credit cards. Regular APRs above 20% are common, even in low-interest-rate environments. Low APR introductory promotions are nonexistent. Secured credit cards issued by credit unions tend to have lower APRs, but those cards generally require credit union membership and therefore may not be available to the general public.
Annual Fees: Most secured credit cards carry annual fees. These fees are usually modest by premium credit card standards Rs 3000 to Rs 6000 is a typical range. The few secured cards that don’t charge annual fees typically have stricter underwriting requirements and are therefore likely off-limits to severely impaired applicants.
Security Deposit Forfeiture and Refund: Security deposits remain safely ensconced in collateral accounts until one of two things happen: the credit card account becomes seriously delinquent, or the cardholder pays off the card’s balance in full and closes the account. In the first instance, the issuer seizes part or all of the security deposit, depending on the size of the past-due balance. In the second instance, the issuer returns the security deposit, with interest if applicable, to the cardholder.
Advantages of Secured Credit Cards
1. Can Qualify With Imperfect Credit
You don’t need great credit to qualify for a secured credit card. That’s kind of the whole point. If you have a good credit score and strong credit history, you’re likely to qualify for an unsecured card with lower rates, better terms, and more generous rewards. Why would you choose an inferior option?
Read more what are native effect of credit score
2. May Improve Your Credit Score and Build Credit Over Time
Virtually all secured credit card issuers report users’ credit utilization and payment patterns to the three major credit reporting bureaus.
If you hold up your end of the bargain and use your card responsibly, this regular reporting could raise your credit score and build your credit profile over time. Assuming no setbacks elsewhere, you’re likely to find yourself in a significantly better position a year or two down the road.
Before you apply for a secured credit card, read the fine print or call the issuer to confirm that it does in fact report to the three major bureaus. With so many choices out there, you have no incentive to use a secured card with no possibility of building your credit
3. Makes Certain Types of Transactions Possible
Secured credit cards are decidedly non-traditional, but they’re still credit cards. With that designation comes some important privileges and conveniences. Two, in particular, deserve attention:
Flexibility to Make Emergency Purchases. When the unexpected happens, your secured credit card’s credit limit provides an important (and potentially decisive) cushion. If you don’t have enough cash in your bank account to cover an emergency auto repair bill or impound fee, to cite but two common examples, you can charge it to your secured card and pay it off over time. While it’s always preferable to pay off credit card balances in full, especially when the interest rate is on the high side, losing some money to interest charges might be preferable to the alternative.
Ability to Make Deposits and Reservations. Some travel merchants, such as hotels and rental car companies, require credit cards to secure reservations or cover potential damages during a stay or rental period. Traveling long distances without a credit card in your wallet is not recommended.
4. Deposits May Earn Interest
Many secured credit cards, though not all, earn interest on security deposits held in collateral savings accounts. In most cases, yields are nominal – less than 0.5% APY, and often less than 0.2% APY. Some secured cards backed by credit unions offer more attractive yields – as high as 3% APY, in some cases. Regardless, any yield is better than no yield when it offsets the (likely) recurring annual fee.
5. Everyday Spending May Earn Rewards
It’s not uncommon for secured credit cards to earn rewards, most often cash back or travel points at modest rates. The Discover it Secured Credit Card, for instance, earns 2% cashback on qualifying purchases made at restaurants and gas stations – up to Rs 5,000 per quarter combined. All other qualifying purchases earn 1% cashback, with no caps on earnings.
6. Low Credit Card Spending
Though secured credit cards’ relatively low spending limits are usually held out as a drawback (see below), the security deposit itself credit card spending. Secured credit card users can’t fall too deeply into debt, if only because they can’t overspend their security deposits.
7. Opportunity to Graduate to an Unsecured Card
Many secured credit card issuers define clear “graduation” pathways for responsible cardholders. Precise policies vary, but cardholders who make timely payments can typically upgrade to unsecured cards in as little as six to nine months. (Some cards have longer runways – a year or longer.) If you’re happy with your current issuer and you don’t want to go through the hassle of searching for an unsecured card elsewhere, this is a great opportunity to take the next step in your credit journey.
Disadvantages of Secured Credit Cards
1. Usually Requires Some Credit History
Most secured credit cards require pre-approval credit checks. They thoroughly examine your credit history – the good, the bad, and the ugly.
Pre-approval credit checks look at your credit score too, of course. If you’ve had a major adverse event in the very recent past, such as a non-discharged bankruptcy, you’re unlikely to qualify for most secured cards. That’s sort of ironic, given that secured credit cards are designed to build credit for people who could use a hand, but it is what it is.
A few cards don’t require pre-approval credit checks, but they tend to have higher rates, more onerous fees, and less favorable terms overall. If you’re a first-time credit user or have truly abysmal credit, think carefully before applying for a secured credit card.
2. Likelihood of Higher Interest Rates
By and large, secured credit cards have higher interest rates than unsecured credit Card APRs start below 10%, a fantastic rate for any credit card. But, by and large, secured cardholders have to pay a premium for the privilege of using credit.
3. Higher Fees
Most secured credit cards charge annual fees, usually between Rs 3000 and Rs 6000. That’s a distinct drawback relative to run-of-the-mill rewards credit cards and low APR products for consumers with good to excellent credit.
Secured cards that allow balance transfers and cash advances typically charge higher fees for those transactions as well – up to 5% of the transaction amount.
And cards with looser underwriting standards may impose additional, unorthodox fees, such as monthly insurance premiums. It’s not a given that issuers will be upfront about these fees, so it’s up to you to read the fine print in your credit card disclosures and check for complaints filed with consumer protection authorities.
4. Relatively Low Spending Limits
A secured credit card is not a license to spend. Even if you have the means to make a sizable security deposit, you’re limited by issuer-imposed caps – rarely more than Rs 1,00,000, and often less than Rs 3,00,000. If you need to finance a major purchase, such as a big home improvement project or a new car, a secured personal loan (see below) is likely a better call.
5. You Usually Can’t Outspend Your Security Deposit Without Paying Off Your Balance
With rare exceptions, you can’t overspend your secured credit card’s security deposit without paying off your card balance. This isn’t ideal for cardholders who want the flexibility to carry a balance from month to month.
Be cautious with your secured credit card spending, even if your monthly income and spending limits tempt you to loosen your belt. The best way to build credit with minimal cost or downside risk is to charge a handful of purchases to your secured card each month and promptly pay them off in full.
6. Credit Bureau Reporting Might Not Be Discreet
Before you apply for a secured credit card, ask the issuer how it will look on your monthly credit reports. In most cases, the entry won’t look any different than an unsecured credit card’s. But some issuers add notes to secure credit card reports that give the card’s nature away. When you apply for another loan or credit card and the lender pulls your credit, they’ll see that you have an active secured credit card account. Depending on their underwriting practices, that could be a red flag that lessens your approval chances.
7. Potential for Damage to Your Credit Score
Credit is a privilege, not a right. If you’re not careful with your credit utilization or careless about when and how you make payments on your balance, you could actually hurt your credit score. Missing statement due dates is a big no-no, for instance. Be honest with yourself: If you’re not ready for a credit card of any sort, acknowledge that, work on your financial fitness, and circle back when you feel better about your ability to handle a credit card of your own.
8. No Security Deposit Access Until Your Account Is Closed
When you send in your security deposit, you’re kissing it goodbye until you pay off your balance and close your account – or default, a much less favorable outcome.
If your cash flow is barely positive, it’s easy to envision a situation in which you’d need the funds earmarked for your security deposit. Do your budget a favor and wait until you have more financial breathing room to apply for a secured credit card, or look to an alternative that doesn’t require an up-front security deposit that’s then locked away for months or years.
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