Secured Vs Unsecured credit cards
What happens when you apply for a credit card? The credit card provider looks up your financial history, credit score, credit worthiness, outstanding credits, loans against your name etc. before they approve your request. Based on the findings, you will be offered an unsecured credit card, which means that there is no collateral against the offer. The credit card is issued because the provider believes that you have the wherewithal to repay the dues. This is an unsecured credit card. This method of issuing cards works as long as you have a minimum monthly salary and a credit history to speak of.
What about individuals who do not have a regular monthly salary? For instance, a freelancer. He gets paid when his work is approved and it can be monthly or once in 3 months. The point is that there is no uniformity to when he gets paid and how much he gets paid. So when a credit card provider looks up his financial history, all he sees is an assortment of different payments made at different points in time. This hardly counts as a stable financial history. It is for such people that banks have now started offering secured credit cards.
How do they work?
To be eligible for a secured credit card, an individual needs to have a fixed deposit with the bank. He can avail a credit limit of up to 80% of the fixed deposit amount and he is not allowed to break the deposit as long as he has a card against the deposit. For such credit cards, there is almost no documentation required because you are placing collateral against the card. Therefore, the request for a secured credit card against a fixed deposit is approved almost instantly.
Secured credit cards have become an instant hit among Indians who do not have a regular monthly salary or a decent credit history. India has a burgeoning middle class, a major portion of which is salaried. But the other portion, a quite significant one, can make use of secured credit cards to meet their urgent requirements.
Lots of options now in 2017
Realizing the rising demand for secured credit cards, many top players like SBI, Axis bank, ICICI, Kotak Mahindra Bank, Central Bank of India and Bank of Baroda etc. have started issuing cards for people holding fixed deposit with their banks. The SBI Advantage Plus Card is leading the pack in the segment because being one of the most reputed banks in India; they already have a large number of customers with fixed deposits with them. It is only a matter of aggressive cross selling before more customers fall into the secured credit card fold. Another top seller in this segment is the ICICI Bank Coral Credit card which allows customers to avail credit cards against their fixed deposits. Similarly, the Axis Bank Insta Easy Credit card is also an attractive option.
Benefits of secured credit cards
- People with low credit scores and no monthly salary can avail credit cards
- Zero documentation
- Eligible for higher credit limits (almost 80% of the fixed deposit amount)
- Interest free period of 48 days to 55 days
- They will continue to earn interest on their FDs
- Helps in building a credit history
- Good opportunity to boost your credit score.
Downside of secured credit cards
- Since your fixed deposit is the collateral against which the credit card is issued, you cannot withdraw the deposit for an emergency.
- Defaulting on the credit card payment will affect both the credit score as well as your fixed deposit.
For people who do not stand a chance to avail an unsecured credit card, secured credit cards seem to be the only option. Banks have made them quite attractive over the years and the availability of collateral against which the cards are issued minimizes the need for documentation, which in itself finds a lot of takers.
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