Secured Credit Cards vs Unsecured Credit Cards

Credit cards are known to be a blessing for managing your monthly finances and lowering some financial burden off your shoulders. However, people with low to no credit history may find it difficult to get one on favourable terms. Here’s when a secured credit card can help. But what is a secured credit card, and how is it different from an unsecured credit card? Continue reading to find out.

What is a Secured Credit Card?

A secured credit card is a type of credit card that requires you to make a cash deposit upfront as a form of security. The amount you deposit usually matches the credit limit you’re given. For instance, if you deposit ₹50,000 as collateral, your credit limit will generally be ₹50,000. This type of card is particularly useful for those looking to build or rebuild their credit. Because your payment activity is reported to the credit bureaus, a secured credit card gives you the chance to improve your credit score and strengthen your credit history over time.

How Does a Secured Credit Card Work?

Secured credit cards function much like regular credit cards, but they come with certain restrictions, particularly regarding the credit limit and other related factors. Typically, the credit limit on a secured credit card is set between 75% and 85% of your fixed deposit (FD) amount. For instance, if you have a ₹1 lakh FD, your credit card limit would likely fall between ₹75,000 and ₹85,000. Consequently, a larger FD would result in a higher credit limit on your secured credit card.

Banks offer secured credit cards against FDs because the FD serves as a form of collateral. If the cardholder fails to make payments, the bank has the authority to liquidate the FD to cover the outstanding balance on the credit card.

Advantages of a Secured Credit Card

There are several benefits of a secured credit card, such as:

1. 1. Convenient

      Getting a credit card can be as simple as walking into a bank branch to open a fixed deposit and walking out with a card in hand. There’s no need for income verification or background checks; the documents you use for the fixed deposit also serve for the credit card application.

   2. Build a Credit History

      If you’ve struggled with a poor credit score or have no credit history at all, a secured credit card can help you start fresh. By using the card responsibly—staying within your limit and paying off your balance on time—you can steadily improve your credit score. Consistent usage and timely payments are key to rebuilding your credit quickly. Once your score is healthy, you’ll have more opportunities for other types of credit cards.

   3. Earn Interest on Your FD

      Your fixed deposit doesn’t just act as collateral; it also earns interest while it sits in the bank. Depending on the deposit term, you can accumulate a respectable amount of interest.

   4. Low Annual Fees

      Another advantage is that many banks in India offer secured credit cards with either low or no annual fees. Plus, the initial deposit requirement is typically affordable, with some banks asking for as little as ₹10,000, making these cards an accessible option.

Considerations Before Taking a Secured Card

1. 1. Security Deposit: You will have to give a security deposit initially when you get a secured card. However, this security deposit is refundable when you close your account or turn the secured card into an unsecured card.
   2. Limited Credit Limit: The credit limit of your secured credit card depends on your security deposit. This can be lower than what you expect, which is not good if you want to cover major expenses.

What is an Unsecured Credit Card?

Most credit cards are unsecured, meaning they don’t require you to put down a deposit as collateral. These cards typically offer better benefits, such as attractive rewards, lower fees, and more favourable interest rates. For most people, unsecured credit cards represent a more advantageous option.

However, it’s understandable why someone might consider a credit card that demands an upfront cash deposit. For those with poor or no credit history, securing a traditional unsecured credit card can be extremely challenging. Without access to credit, improving one’s credit score becomes nearly impossible, making secured cards a viable alternative for building or repairing credit.

Advantages of an Unsecured Card

1. 1. No Security Deposit

      Unlike secured credit cards, unsecured ones don’t need a security deposit. Instead, the credit card issuer sets your credit limit based on your credit profile.

   2. Higher Credit Limit

      Unsecured credit cards often provide higher credit limits than their secured counterparts. This limit depends on your creditworthiness and overall financial condition.

   3. Different Rewards and Benefits

      Typically, unsecured credit cards offer a range of rewards, including cashback and travel perks. These benefits are generally designed for those with good to excellent credit scores.

Considerations Before Taking an Unsecured Card

1. 1. High Interest Rates: Unsecured credit cards come with high interest rates, especially for individuals with low credit scores. So, if you miss a monthly payment, the remaining balance can incur high interest rates.
   2. Approval Criteria: Getting an unsecured credit card depends on your creditworthiness. Hence, people with poor credit scores may find it difficult to get a credit card on favourable terms.

Secured Credit Cards vs Unsecured Credit Cards

Which is Better – Secured Credit Cards or Unsecured Credit Cards?

Secured credit cards or unsecured credit cards – which one should you choose? This mostly depends on your financial situation. A secured credit card may be better for repairing or building your credit history, but it requires collateral. On the other hand, an unsecured credit card is more accessible as it does not demand collateral, but it requires you to have a good credit score.

So, if you are looking to build your credit history, a secured credit card is a great choice. But if you already have a good credit history, an unsecured credit card is an ideal choice.

Frequently Asked Questions (FAQs)