Banks offer secured credit cards against fixed deposits as collateral. These cards are usually aimed at those who cannot avail regular credit cards due to reasons like low or no credit score, unserviceable location, inadequate income, job profile or employer’s profile.
Let’s take a look at some of the crucial features of secured credit cards
As secured credit cards are issued against collateral in the form of fixed deposits, it reduces the credit risk of banks. In case a credit card holder fails to repay his card bill, the bank has the liberty to liquidate fixed deposits to recover outstanding dues.
Owing to this risk-free attribute, banks do not factor the applicant’s credit score, income, employment profile, unserviceable location, etc, as they do while evaluating applications for regular credit cards.
Just like regular credit cards, transactions made through secured credit cards are reported to the credit bureaus. The credit bureaus then factor in this data while calculating credit scores. Thus, secured credit cards can be a very good tool for building or improving credit score for those having low or nil credit score, thereby, improving their eligibility for availing loans and secured credit cards in the near future.
Banks set credit limits of secured credit cards against the fixed deposit value used as collateral. Depending on the risk appetite of the bank, the credit limit of the secured credit card usually ranges between 80-90% of the fixed deposit value offered as collateral.
The fixed deposits used as collateral to avail secured credit cards continue to earn interest till their maturity. In this sense, availing a secured credit card is the same as opting for a loan against FD or a loan against securities wherein the borrower continues to generate returns from his securities offered as collateral.
Ability to leverage fixed deposits through secured cards also leads to higher capital efficiency for cardholders if they repay their credit card bills on time.
Cardholders can easily access credit through their secured credit card to meet their short-term financial mismatches without closing their FDs prematurely. Most banks penalise premature withdrawal of FDs by charging a penal interest rate of up to 1%. This penal rate is then subtracted from the effective rate of interest of the fixed deposit, which is usually the lower of the original booked card rate and the card rate of the period for which the FD has been in effect.
Thus, secured credit cards offer sanctioned credit line to their users and save them from incurring opportunity costs involved in premature FD withdrawal. This feature can especially be helpful for those facing frequent but very short-term cash flow mismatches.
As the pledged fixed deposit is lien marked by banks, secured credit card users cannot close their fixed deposit account till the card is closed or reaches its expiry. Thus, those looking to opt for secured credit cards should consider submitting only those FDs as collateral without which they can easily manage till the expiry of their secured card.
Avoid using fixed deposits earmarked for emergency funds or short-term financial goals as collateral for availing secured credit cards.
Just like regular credit cards, secured credit cards offer reward points, vouchers, discounts, etc on transactions made through them. Also, they offer interest free period on credit card transactions and levy finance charges on non-payment of the credit card bill by the due date.
However, the diversity and consumer choice offered by card issuers in the case of secured credit cards are not the same as regular credit cards. In the case of regular credit cards, card issuers offer numerous card types, such as fuel, travel, shopping, premium, and reward cards for targeting specific consumer requirements. In the case of secured cards, most of the issuers offer just one or two variants. This deprives secured cardholders of the freedom to select their card on the basis of their spending pattern and lifestyle.