Secured Credit Cards—How They Work and Their Pros & Cons

The novel coronavirus (COVID-19) pandemic has majorly impacted the financial conditions of billions around the world. People have lost their jobs, investments have tanked, consumer debt is at an all-time high, and there are barely any financial lenders available. To survive in this COVID-19 situation, people procure “secured credit cards” to find some short-term financial relief.

What is a Secured Credit Card?

A secured credit card is different from your regular credit card. It offers financial assistance to people with poor or limited credit. A secured credit card requires the user to pledge a refundable security deposit with the bank or the credit card issuer company. This deposit is used as collateral security till the time the account is closed.

By issuing secured credit cards, banks and credit card issuers can offer financial credit to even the most inexperienced applicants as well as those with bad credit history. When things go wrong and the cardholders are unable to make payments or clear the dues, the issuer can keep the secured deposit and close the account.

Statistically, secured credit cards have the highest approval rates when compared with other types of credit cards. Similarly, the issuers do not charge high fees for issuing these credit cards, even if it is for users with bad credit. The refundable deposit placed as collateral security by the cardholders can be doubled up by the users at any time. Hence, you end up paying less than your repayment capacity. Eventually, it appears as if you have hardly borrowed any money from these cards.

Secured credit cards are also cheaper as issuers do not charge any non-refundable fees for compensatory services. This low-cost, high-profit combinative characteristic of secured credit cards gives people with poor credit history a second chance at rebuilding their credit.

Here’s how you can use a secured credit card:

1. Place a security deposit with a bank and apply for a secured credit card against it. Usually, the minimum deposit starts at INR 1.5 lacs.
2. Once the application is approved, get a spending limit based on the credit card policies. Make sure that the spending limit keeps you comfortable during repayments. Do not exceed your spending power.
3. Since the credit card company holds that deposit as collateral, your funds are safe in a custodial account and they do not bear any additional interest rate.
4. Spend up to your credit limit and clear the balance month-to-month to avoid accruing interest. Avoid repayment failures at all costs.
5. When you close your account, get your deposit back and enjoy an improved credit score.

Several credit card issuers and banks also allow users to add more funds to their collateral deposit and increase the spending limit of their secured credit cards. 

Secured Credit Cards – Pros & Cons 

Secured credit cards are mostly viewed as a good option for rebuilding credit scores. The benefits of using secured credit cards include:

• Easy and quick approval
• Low-risk credit facility for banks
• Smoothly audited by credit bureaus
• Redeemed credit history benefits future loan applications
• Feasible and timely repayments
• Rewards on some purchases
• Late payments do not hamper the credit score
• Easy to qualify for a regular credit card later

However, secured credit cards were also viewed by some as bad finance options. Here’s why: 

• People face difficulties in coming up with the security deposit amounts, which are usually huge for those with bad credit.
• Some banks levy higher interest rates on the repayments.
• There is always a slight risk of failing to get back the security deposit due to instances of repayment failure.

To sum it up, there are more pros than cons to having a secured credit card. Considering the current financial instability around the world, getting a secured credit card seems wise.