Fixed Deposit credit cards are also known as Secured Credit Cards as fixed deposit accounts back them. The fixed deposit acts as collateral for the credit card, and lenders can seize the fixed deposit amount if the borrowers default on their debts. The fixed deposit keeps earning interest simultaneously, so the borrower receives the principal amount and the interest when it matures. These credit cards are great for people eligible for unsecured credit cards due to a lack of consistent income, bad credit scores, or not meeting other requirements. Just like unsecured credit cards, knowing the pros and cons of secured credit cards is important.
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Keep reading to learn about the pros and cons of secured credit cards.
Pros and Cons of Fixed Deposit Credit Cards
Secured credit cards work the same way as regular credit cards. One should consider the pros and cons of secured credit cards before applying. Here are some of the pros and cons of secured credit cards:
Pros and Cons of Secured Credit Cards: Advantages of Secured Credit Cards
Easy Approval
Secured credit cards are easier to get approved for than unsecured ones, as the bank does not have to check your credit score or history. You can obtain a secured credit card if you have enough money to use as collateral in the fixed deposit account. This makes it a good option for people new to credit or with poor or no credit scores.
Credit Building
Secured credit cards can help you build or improve your credit score, as your payment history is reported to the credit bureaus. By making timely and full monthly payments, you can show that you are a responsible borrower and increase your creditworthiness. This can help you qualify for better credit products in the future, such as loans, mortgages, or unsecured credit cards.
Low Fees
Secured credit cards usually have lower fees than unsecured ones, as the bank has less risk of losing money. Some secured credit cards may even have no annual or joining fee, saving you money in the long run. However, you should still compare the fees and charges of different secured credit cards before choosing one.
Rewards and Benefits
Some secured credit cards may also offer rewards and benefits to their users, such as cashback, discounts, air miles, or insurance. These perks can make your spending more rewarding and enjoyable. However, you should not spend more than you can afford just to earn rewards, as this can hurt your credit score and budget.
Pros And Cons Of Secured Credit Cards: Disadvantages of Secured Credit Cards
Limited Credit Limit
Secured credit cards come with limited credit limits compared to their unsecured counterparts. Usually, the limit of a secured credit card is equal to a percentage of the fixed deposit backing it. This percentage is usually between 80-90% of the fixed deposit amount. This limits the amount of money you can spend from your credit card as you are limited by the amount of money in your fixed deposit. This results in limiting your purchasing power and flexibility while buying. However, you can increase your credit limit by depositing more money in your fixed deposit.
Interest Rate
Just like unsecured credit cards, secured credit cards have interest rates that need to be paid if you do not repay your entire borrowed debt every month. These interest rates can be higher than secured credit cards, depending on your credit score and the lender. To avoid paying the interest charges, it is always advisable to repay the borrowed amount in full at the end of every month.
Risk of Losing Money
Secured credit cards are secured with the money held in fixed deposit accounts. Therefore, there is always a risk of losing the fixed deposit amount if the borrower defaults on debt payments. This is a risk that unsecured credit card holders do not face. Lenders can also withhold the fixed deposit amount until all debts are paid back in full. This makes keeping track of your repayments and paying debts back on time extremely crucial.
Conclusion
Secured credit cards are good options for people ineligible to apply for unsecured credit cards. Secured credit cards are backed by fixed deposit accounts, which act as collateral and can be seized by leaders if the borrowers default on their debts. They allow the borrowers to build a good credit report that can make them eligible to apply for loans and credit cards in the future. However, like all financial instruments, it is important to learn the pros and cons of secured credit cards before applying. While repaying secured credit card debts on time can improve credit scores, defaulting on repayments can damage credit scores and even result in losing the fixed deposit amount. Cardholders must be timely with their repayments and understand the pros and cons of secured credit cards to enjoy their benefits.
FAQs
1. Why is it important to learn about the pros and cons of secured credit cards?
Knowing the pros and cons of secured credit cards is important so that cardholders can make financial decisions that improve their credit score and keep their fixed deposit account. Making wrong financial decisions can damage their credit scores and lead to the seizure of their fixed deposit accounts.
2. What happens to my fixed deposit if I cancel my secured credit card?
If you cancel your secured credit card, your fixed deposit account will be released, and you can withdraw your money. However, you may have to pay charges or penalties for cancelling the card.
3. Can I upgrade my secured credit card to an unsecured one?
Yes, depending on your card issuer and credit history, you can upgrade your secured credit card to an unsecured one. Some card issuers may allow you to convert your secured card to an unsecured one after a certain period if you have made regular payments and improved your credit score. Other card issuers may require you to apply for a new unsecured card and close your secured card account.
4. How long does it take to apply for a secured credit card?
The time taken to apply for a secured credit card depends on the bank and your fixed deposit type. If you have an existing fixed deposit with the bank, you can apply for a secured credit card within a few minutes. If you do not have a fixed deposit, you must open one first and then apply for the card.
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