The pros and cons of 'secured credit cards'

Here's a new option that banks have recently rolled out to meet your plastic money needs.

If your credit card has been rejected due to varied reasons and you are desperately in need of one, you can certainly help the bank with some cash and change their mind towards your application.

No... I am not talking about bribing the bank executives. It is a new option that banks have recently rolled out to meet your plastic money needs.

It is called 'Secured Credit Card' in financial terms. Well, the concept is simple. You deposit some amount of cash as a fixed deposit with the bank and they will return a favour by issuing a credit card.

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Courtesy: Am22Tech.com

Benefits

1. Issued even if you have bad or no credit history

If you have no credit history or a bad one, this is the card for you. Banks would ignore your credit history as you are making a fixed deposit with them. They can recover their money anytime from your FD, if you default.

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2. Create credit history

This is one of the best benefit that you can draw out of this card. If you are struggling to get your first credit card or loan due to lack of credit history or say NO history, get this card and find yourself welcome in the CIBIL(credit history) database easily.

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Drawbacks?

1. Puts a lien on your fixed deposit

This effectively means that bank can take out money from your fixed deposit to pay for any outstanding amount on your credit card anytime. As the name says secured, your bank is always secured that they will get their money back.

The lien is removed if you surrender the credit card with bank without breaking the FD.

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Less credit limit than your actual fixed deposit

Banks are very cautious while issuing you a secured credit card. They only give you a credit limit of about 80-90% of your total fixed deposit with the bank.

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2. Functions like a debit card but less flexible

You cannot spend more than your credit limit, cannot even spend an amount equal to your fixed deposit. As mentioned in above point, the spending limit is just 80-90% of your total fixed deposit.

On the other hand, you can spend full amount stored in your savings account via debit card.

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3. Card lifetime is attached to FD lifetime

Break your FD and give away the card too. The card is valid until the FD is valid. Once you break your FD to meet any emergency, your card also stops to work.

Conclusion

The card is no different than a debit card which is issued with a normal savings account by a bank. The only benefit that you draw over debit card is that you get a repayment time for your purchases. In debit card transactions, the cash is immediately deducted from your account.

Keeping in mind the above points, I would recommend you to go for a secured credit card only if you don't have any other option left at your disposal.