As many as 408 million adults are credit unserved in India. In other words, they have no credit history attached to them, according to TransUnion CIBIL.
If you’re a student or just started working, you most likely don’t have a credit score. But your credit score matters a lot. Think of it as your financial report card. Credit agencies will assess your eligibility to handle debt based on your credit score.
Maintaining a high credit score is important if you are planning to apply for a loan in future. A CIBIL score above 750 is great for faster loan approvals and helps you avail good interest rates as well. Ironically, you need to have a credit history to build a credit score. Without a credit score, companies will not lend you any money. So, how on earth can you build a credit score?
Don’t worry, there’s still a way. You can build your credit score through “Secured Credit Cards”.
What is a Secured Credit Card?
A Secured Credit Card is one where you will get access to credit after making a fixed deposit. This deposit will act as collateral in case you default on making repayments.
The credit limit for secured credit cards is determined based on the amount deposited as Fixed Deposit. Usually, up to 85% of the deposited amount will be given as credit limit.
Let me explain with an example:
Let’s say you want to build a credit score from scratch. You will need to get in touch with a bank that offers a Secured Credit Card. You will need to make a FD in the bank, and later the bank will use this amount as collateral, and open a credit line for you.
If you made an FD of Rs 1 Lakh, you’ll receive a credit limit of up to Rs 85,000. This will vary based on the bank as well.
Now, if you default on making back payments, the bank will break this FD and deduct the amount that’s due. This is exactly why the credit limit is only around 85% of the deposited amount. Hence, the bank’s money is safe. Also, this is why it is easier to get a secured credit card.
An important thing to note is that, if in case you want to break the FD, the bank will first close the credit line, settle pending dues if any, and only later will you receive the money.
Also Read: Emergency Fund is like your superhero savings account. How to build it?
Pros and cons of a secured credit card
Pros:
- Can be easily opened with very few documents and verifications.
- Certain banks offer minimum deposits starting from just Rs 20,000.
- Get 70-80% of the FD as your credit limit.
Cons:
- Lack of choices. Very few options are available, especially in terms of rewards.
- You can’t withdraw the FD until you have no dues left.
- Requires upfront capital which can cause liquidity issues for certain people.
You don’t necessarily have to use a secured card forever. This can just be the first step towards acquiring a credit score. Once you’ve built substantial credit, you’ll be eligible for unsecured credit cards as well, which will reward you with better benefits.
A small tip that may benefit you
Personally, I was on the lookout for a secured credit card as well. Here’s a tip you could use based on my experience. On enquiring with a few banks, I learnt the prerequisite to getting a secured card is having an account with the bank.
Once you have an account – either savings or salary – you can start a Fixed Deposit in the same bank and then apply for a credit card. It makes more sense to make an FD in your existing bank account and get a secured credit card. Otherwise, you’d have to go through the hassle of maintaining minimum deposits plus an FD to get a card.
