Neha is a 26-year-old young marketing professional. She wants to apply for a home loan in a few years. In these years, Neha plans to save money for the down payment and build a good credit score. On the suggestion of her colleague, she applies for a secured credit card. However, she was confused between secured and unsecured credit card. To understand, let us see the working of secured vs. unsecured credit card and check out the differences between these types of credit cards.
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Let us take an example to understand how secured credit cards work. If your friend gave you Rs.1000, would you lend your friend Rs.800? You can easily lend the money as you have their money and there is no risk. This is how banks offer secured credit cards to their customers.
Financial institutions such as banks offer secured credit card against collateral such as Fixed Deposit (FD). Hence, secured credit cards are called Credit Cards against FD.
Few banks provide the facility to apply for a secured credit card online while opening a Fixed Deposit. Banks determine the minimum Fixed Deposit amount needed to avail the secured credit card. The minimum FD amount to get a credit card starts around Rs.15,000. The credit limit of the card is around 80% of the fixed deposit amount.
It is easy to avail these credit cards as the banks offer these cards against FD. Customers with no credit history, low credit score and without income such as students, housewives, and young professionals can also apply for this credit card against FD.
Banks report details such as bill payments and credit utilisation to the credit bureaus such as CIBIL regularly. As a result, proper use of credit card and paying the dues on time can help to build credit history and improve credit score.
As these credit cards are backed by a lien, if the customer doesn’t pay the bills and dues and defaults on the payments, the bank will adjust the outstanding dues against the linked FD.
As the name suggests, banks issue unsecured credit cards without collateral. As these are unsecured credit cards, banks set the credit limit of the card. The credit limit of the card will vary from person to person and will depend on various factors such as credit score and income. Depending on your utilisation, banks can also raise the credit limit of this card from time to time. Unsecured credit cards come with higher credit limit. This makes it affordable for customers to make large purchases or convert it to EMIs.
Financial institutions launch different types of unsecured credit cards to offer the best offers and rewards to their customers.
At the end of the cycle, cardholders need to pay their dues on time to avoid late fees and other charges. They can also pay the minimum requirement and pay the rest in the coming months.
While unsecured credit card come with a lot of perks and benefits, it is also easier to fall in a credit card debt cycle. As a result, it is important to pay the dues on time or opt for an auto pay option, if possible.
Here are a few similarities between secured and unsecured credit cards.
Joining Fees and annual fees
Depending on the bank, secured and non-secured credit cards have joining fees and annual fees. Customers need to pay the annual fees to continue using the credit card.
Users of both the credit cards have an interest-free period when they can avail interest free credit on their purchases. The interest-free period is around 40-50 days.
Report of your payment history
Banks report the payment history of their secured and unsecured credit card users to credit bureaus. The credit score will depend on these reports.
Build credit score
As banks report payment history, using the credit card wisely, paying your dues on time and keeping a low utilisation ratio will aid in building credit score.
Offers and cashback
Secured and unsecured credit cards offer different benefits and cashback. Cardholders can avail these offers while shopping and transacting.
The key difference between secured and unsecured credit card is the presence or absence of collateral. Secured cards are given against collateral such as a fixed deposit. Regular credit cards don’t need any collateral.
Secured credit cards are easy to avail than unsecured credit cards. In most cases, customers need to book a Fixed Deposit of the minimum required amount to get a secured credit card. However, banks offer unsecured credit cards to individuals with a good credit score and income.
The credit limit of credit card against FDs depends on the fixed deposit amount. The maximum limit is mostly 80% of the booked FD. Credit cards like Kotak Aqua Gold Credit Card have a maximum credit limit of Rs.12 lakhs.
The credit limit of secured credit card depends on the customer’s eligibility. Banks consider various aspects such as credit score and income of the customer are considered while deciding the credit limit.
While both the cards provide offers and cashback, regular credit cards offer higher and better offers than secured credit cards. It is because the aim of credit card against FD is to build credit. Unsecured credit cards want to attract customers through their offers and benefits.
Secured and unsecured credit cards are meant for different customers. You need to understand your objective while selecting a credit card.
As one can avail secured credit card against a fixed deposit, it is one of the safest, easiest and affordable options to build credit history or repair credit score.
However, if you have a good credit score, getting a regular credit card may be a better option.
No matter what kind of credit card you choose, it is important to clear all your dues each month to improve your credit score and stay away from the credit card debt trap.
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