Secured Credit Cards – A Gateway to rebuild your CIBIL Score

Despite the marketing efforts of banks and financial institutions to sell their credit services, the credit card penetration still hasn’t reached its peak. Ironically, the number of credit card applicants are increasing exponentially, but due to a rigorous procedure and meticulous screening, they are unable to prove their creditworthiness. The most critical parameter is the CIBIL score and the monthly income of the applicant.  That said, the CIBIL score can only be improved by getting credit. So, how can a borrower bailout from such a scenario?

The best way is to avail a Secured Credit Card. So, let’s define it.

It’s a card that has the backing of a secured payment like Fixed Deposit, which is used as collateral. They are issued to thin file borrowers (Borrowers who don’t have a healthy Credit History). When banks report agencies like CIBIL regarding the card usage, the CIBIL score of the applicant improves.

So if you have open a Fixed Deposit, then banks will be more than happy to offer you a Secured Credit Card, as it will be a win-win situation for them. In case you fail to make the payments, then in order to recover their debts, banks can liquidate the Fixed Deposit.

It must be duly noted that you cannot close your Fixed Deposit account till the time you are using a Secured Credit Card. Generally, the credit limit on such cards is usually capped at 85% of the Fixed Deposit amount. Apart from this, a Secured Credit Card works just like a regular Credit Card, meaning, you can get all the privileges. Moreover, you can earn interest on your FD as usual.

 Secured credit cards work for you if:

  • You have a low CIBIL score
  • You are unemployed
  • You are living in a blacklisted area
  • You are an employee of a blacklisted company

Why are Secured Credit Cards considered to be advantageous? 

  • They help in bettering your credit score: Having a secured credit card reflects a financial discipline. It’s a sign that you are using your card in a prudent manner and are timely paying your bills. All this builds your credit credibility, which in turn improves your Credit Score.
  • They help in bettering your credit history: Most of the loan applications are rejected because borrowers don’t have a credit history. Moreover, neither borrowers are aware of their CIBIL score, nor banks inform them regarding that. The status quo is maintained as borrowers remain unaware of the reason behind their applications’ rejection. low CIBIL score. This is when secured credit cards come to the rescue as they help borrowers build their credit history from scratch, which eventually improves their CIBIL score.
  • They help in expanding your credit limit: In case you have a Fixed deposit with a bank, then there is no reason why you shouldn’t opt for a secured credit card. You will just be required to pay the processing fee and nothing else. This way you can expand your credit limit and earn interest on your fixed deposit at the same time. In short, it will be a win-win situation for both you and your bank.

Important points to remember

  • Make sure to use your secure credit card regularly: It’s important to use your card on a regular basis. You should be disciplined in making your payments; otherwise, your CIBIL score will plummet, and the whole purpose of availing the security credit will remain unfulfilled. Ensure that you don’t use more than 40% of your credit limit; otherwise, you will come across as a credit hungry individual. For example, if your FD amounts to Fixed Rs 1,00,000 and your credit limit is, say, Rs 80,000, then don’t utilize your card for more than Rs 30,000.
  • Report your security credit to CIBIL: Most banks don’t provide security credit reports to CIBIL. You might be using the card for more than a year without CIBIL knowing it. So, once you receive a secured credit card, make it a point to check your CIBIL report after every two months. If the report doesn’t reflect any card usage, then inform your bank regarding this and request it to inform CIBIL. This is how the objective of availing a secured credit card will be achieved.

That said, a secured credit card is not a magic wand, so don’t expect instant results. For instance, if you have been using your card for merely two months, don’t expect your CIBIL score to shoot up. You must understand that creditworthiness is not developed overnight. It can take around two years for CIBIL to notice your overall discipline in dealing with credit. So, patience is the key. We hope this write-up served as a good reference for you, in understanding how secured cards and CIBIL score are related.

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