What Is a Secured Credit Card and How Does It Work?

Credit cards have become an essential part of the modern financial system, allowing consumers to make purchases and access credit for various expenses. However, not everyone can qualify for a traditional credit card due to their credit history or other financial circumstances. That’s where secured credit cards come in. In this article, we’ll explore what secured credit cards are, how they work, and their benefits.

What is a secured credit card?

A secured credit card is a type of credit card that requires the cardholder to provide collateral in the form of a security deposit. The security deposit serves as a guarantee for the credit card company that the cardholder will repay any debts owed on the card. The amount of the security deposit typically ranges from Rs.2,000 to Rs.3,000, and the credit limit of the card is usually equal to or slightly less than the amount of the security deposit.

 Secured credit cards are designed for consumers who have a limited or damaged credit history and may not qualify for traditional credit cards. They allow cardholders to build credit by making on-time payments and keeping their balances low.

How does a secured credit card work?

Secured credit cards work similarly to traditional credit cards, but with a few key differences. When a cardholder is approved for a secured credit card, they must provide a security deposit to the credit card company. The security deposit is held as collateral and will be used to cover any outstanding balances if the cardholder defaults on their payments.

 Once the security deposit is received, the credit card company will issue a credit card with a credit limit that is typically equal to or slightly less than the amount of the security deposit. The cardholder can then use the card to make purchases, and the credit card company will send them a monthly statement detailing their charges and any interest or fees.

 To build credit, the cardholder must make on-time payments and keep their balances low. Making on-time payments is crucial for establishing a positive credit history, and keeping balances low is important for maintaining a good credit utilization ratio. Ideally, cardholders should aim to keep their balances below 30% of their credit limit.

Benefits of a secured credit card

Secured credit cards offer several benefits to cardholders who are looking to build or improve their credit. Here are a few key advantages:

Approval:

Secured Credit Cards are easier to obtain than traditional credit cards because the security deposit serves as collateral, reducing the credit risk for the credit card company.

Credit building:

Secured credit cards allow cardholders to build credit by making on-time payments and keeping their balances low. Positive credit history can lead to better credit scores, making it easier to qualify for traditional credit cards, loans, and other financial products.

Flexibility:

Secured credit cards can be used like traditional credit cards, allowing cardholders to make purchases, pay bills, and build credit.

Conclusion

A secured credit card can be an excellent tool for building or rebuilding credit. By making on-time payments and keeping balances low, cardholders can establish positive credit history and improve their credit scores. However, it's important to choose a secured credit card with low fees, a reasonable credit limit, and a reporting policy that benefits the cardholder. With the right secured credit card and responsible use, consumers can take important steps towards achieving their financial goals.

Read More: How To Choose And Apply For Credit Card