Secured credit cards are designed for customers with very low credit scores, thus allowing them to improve their credit over time through responsible use
When you apply for a credit product, such as a credit card or a loan, lenders use your credit score to determine your creditworthiness and the risk of lending to you. This score represents how you have previously handled your credit accounts, such as personal loans, mortgages and credit cards.
If you are new to credit and do not have a cibil score, obtaining a credit card could prove difficult. One way to overcome this would be get a secured credit card, which will besides giving you access to a credit card will also help you simultaneously enhance your credit score.
What is a Secured Credit Card?
A secured credit card can be obtained by making a cash deposit, often in the form of a fixed deposit to serve as a collateral against your credit card. The deposit amount will also determine your credit limit. This deposit is usually equal to the card’s credit limit. Banks use this as a safeguard to ensure that you do not spend more than the credit limit available on your card.
Secured credit cards are considered less risky by the card issuer since they are backed by a deposit. This also makes them a popular choice for first-time borrowers or those with low credit history.
Secured credit cards work similarly to unsecured credit cards, except that they require an upfront deposit. Cardholders may progressively enhance their credit history by using their secured card responsibly, such as, paying back on time and keeping their due amount payable at each payment cycle low. This strategy offers an easy way to restore credit and obtain access to greater financial prospects.
How Does a Secured Credit Card Help You Build a Cibil Score?
Using a secured, credit card responsibly can significantly help in building your CIBIL score. When you obtain the card use it for everyday purchases such as groceries, energy bills, medical expenditures, internet shopping and restaurants. It is critical to pay off the whole monthly bill by the due date to avoid interest and establish an excellent credit history. Timely payments on your secured credit card help to improve your CIBIL score over time.
However, if you miss a payment, the bank may recover the outstanding amount from the fixed deposit that secured the card. This is why the credit limit is typically set to match the deposit minimizing the bank's risk. Apart from making regular payments, other criteria influencing your CIBIL score include keeping a low credit usage ratio, the age of your credit accounts, the mix of credit kinds and the frequency of credit applications. The responsible use of a secured credit card helps to properly manage these criteria resulting in a higher credit score.
Benefits Of Maintaining a Strong Cibil Score
A good cibil score offers various advantages, including quicker access to credit and loans at favourable rates of interest. With a cibil score of 750 or more, you are more likely to get loans at favourable rate of interest and unsecured credit cards with enhanced credit limit.
A high cibil score also reflects responsible credit behaviour and trustworthiness on the part of the borrower.