If you’re reeling from the grief of an abysmal Credit Score, here’s how a secured Credit Card can help you fix it.
A sinking Credit Score can surely plunge your hopes of buying that dream house or car but with a little hard work, there’s no way you can’t fix it. Why is your Credit Score important, you ask? Well, a Credit Score reveals more about you than you think. Starting from determining your eligibility for a loan or Credit Card to your creditworthiness, a Credit Score has great bearing on your financial standing.
To build a good Credit Score, timely repayment of loans and checking your credit report regularly for errors are absolute basics. It’s therefore wise to check your Credit Score before submitting your application for credit to the bank. Banks and financial companies assign a different Credit Score bracket for different products. In general, a Credit Score of 750+ should put you in the elite league.
If an abysmal Credit Score is playing the perfect spoilsport to your financial aspirations, one of the best and most important ways to fix this sticking point is by getting a secured Credit Card. It is also a great way to build a credit history.
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There are three major credit reporting bureaus: Experian, TransUnion CIBIL and Equifax. They all have different scoring structures when generating Credit Scores. The amount of open and active Credit Card accounts play a large part in determining a Credit Score. So, how does having a secured Credit Card help?
A new secured card can help you build a great Credit Score. It allows potential lenders and creditors to better understand how responsible you are with your credit. Proper use of the card can improve your standing.
Secured Credit Cards are also a useful alternative to traditional unsecured cards. They are great for consumers with low Credit Scores who will most likely face rejection because of the latter.
What’s the difference between secured and unsecured Credit Cards?
First and foremost, a secured card works exactly like any other typical Credit Card. You can use it to pay for purchases at all retailers who accept that particular card. Most secured cards are MasterCard or Visa cards. In this manner, they are no different from a traditional unsecured card.
Every time you swipe at a point-of-sale machine or enter your card details into a retailer’s website, the transaction is complete. When your monthly statement comes, you pay off the balance either in part or in full. This is the same way you would with any other Credit Card.
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The main difference between a secured and unsecured Credit card lies in the fact that a secured Credit Card comes with a cash collateral deposit that becomes the credit line for that account. One of the most important criteria of a secured Credit Card is that it is issued only against a Fixed Deposit with any bank or financial institution. Such cards are secured since the bank has the right to liquidate the Fixed Deposit account to recover debts in case there is a default on payments.
You can apply for a secured Credit Card the same way you apply for any other card except that when the issuer decides to approve you, they also decide on how much of a credit limit you will be afforded. From there, you will be asked for the security deposit amount necessary to receive the card. The cardholder cannot close the Fixed Deposit account as long as the secured card is in his possession. Generally, banks offer a maximum cap of 85% against the Fixed Deposit. One continues to earn interest on the Fixed Deposit as usual.
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Who can avail of a secured Credit Card?
Individuals with the following attributes can opt for a secured Credit Card:
- Are not employed
- Have a monthly income lower than the minimum income cap as set by the bank.
- Have a low CIBIL score
- Work in a ‘blacklisted company’, as specified by the bank.
- Reside in an area that is on the blacklist.
What are the advantages of a secured Credit Card?
In addition to the fact that it can be used like any other regular unsecured Credit Card, the advantages of a secured Credit Card are plenty. Following are some of the benefits:
Helps build a credit history
While issuing a Credit Card, banks review the applicant’s credit history. An individual can build his/her credit history using a secured Credit Card.
Improve your credit score
With proper usage of the card and following basics like making timely payments, a person can build his/her Credit Score by opting for a secured Credit Card. This is important because banks don’t approve Credit Card applications for individuals with a low Credit Score.
Increase credit limit and earn interest on the Fixed Deposit
Opting for a Credit Card against a Fixed Deposit doesn’t incur any extra charges except for the processing fee. The cardholder can increase the credit limit and also earn interest on the Fixed Deposit account.
Faster approval process
The approval process is fast and easier for secured cards because the banks are already risk-free by accepting a security deposit from the borrowers.
Some secured Credit Cards come with a grace period. This means you can use a few extra days to make your payment if it has been delayed for a specific reason. However, delayed payments are also reported to the credit bureaus and as such, it is advisable to make timely payments.
Secured Credit Cards may offer a ray of hope to those with a bad credit history, however, one should take proper care while opting for this card. Since the main purpose of opting for a card like this is to improve one’s Credit Score, one must ensure that all details relating to this card are reported by the bank to the concerned bureau.
One must do thorough research on the fees charged by the bank, such as processing fees, annual fees etc. Opt for the bank that the best deal at a reasonable fee. Try to sign up for a deal where the Fixed Deposit can earn interest while being held as security for the Credit Card.
The interest rate on these Credit Cards is much lower than regular Credit Cards as the bank can easily recover unpaid credit by dissolving one’s Fixed Deposit. This presents a win-win situation for both the borrower and the lender.
Low Credit Score bogging you down? We have a host of Credit Cards on offer that can brighten things up for you.