In many respects, your credit score reflects how you handle your credit responsibilities. So it stands to reason that if you want to improve your credit rating, you should have some open accounts on your credit report.

Credit cards can be an effective tool for achieving your credit-building goals. When you use your credit cards responsibly, they might even help you develop credit without incurring debt.

There is, however, one possible flaw in this credit-building technique. Qualifying for a new credit card account can be tough if you have no or bad credit. Some credit card issuers may refuse to do business with you because of your present credit standing.

Enter your secured credit card. Even if you have bad or no credit, you may be eligible for this popular credit-building tool. Below, we’ll explain how secured credit cards function and show you how they can benefit you.

What is a Secured Credit Card?

A secured credit card is a credit card account that you “secure” with a deposit of your own money. Your deposit serves as collateral for the issuing bank, lowering the risk associated with authorizing you for a new credit card account. If you do not pay as promised, the secured credit card issuer may utilize your deposit to cover the obligation.

In general, when you open a secured credit card, you make a cash deposit equivalent to the credit limit on the account. In other words, a $300 deposit typically results in a credit limit of the same amount. On the other hand, some card issuers, such as Self, may allow you to obtain an additional unsecured credit limit increase to support your deposit. In many cases, your credit limit may be greater than your deposit amount.

Aside from the initial deposit, a secured credit card works similarly to an unsecured card. The card can be used anywhere that accepts unsecured credit cards as payment. Furthermore, any time you use your card (or the secured credit card issuer charges you an annual fee or an interest rate), you must pay the credit card company by the statement due date.

10 Benefits of Using a Secured Credit Card

If you’re wondering “can you rent a car with a secured credit card,” the answer is yes. Indeed, secured credit cards have numerous benefits. If you’re considering getting a secured credit card, here are ten benefits that might interest you.

1. Credit-building potential

Many secured credit card issuers will report your account to the three credit reporting agencies: Equifax, TransUnion, and Experian. Before applying, ask the lender if it reports to all three main credit bureaus. Once the account appears on your three credit reports, a secured credit card can help you improve your credit score.

The influence of a secured credit card on your credit score is determined by your individual credit history and how you use the account.

you get the most out of your secured credit card, make sure you follow basic best practices with your account. Timely payments are essential. Maintaining a good balance-to-limit ratio on your account will also help you monitor your credit utilization rate.

2. Avoidable interest fees

You can avoid paying interest on a secured credit card account by following one easy guideline, just like you would with an unsecured credit card. Make sure to pay off your entire bill balance every month, by the due date. As long as you do not carry a balance from one billing cycle to the next, you should be able to use your account without incurring exorbitant interest rate costs.

3. Better approval odds

Lenders use credit ratings to estimate risk when lending money to consumers. A low credit score indicates to lenders that you are more likely to make substantial late payments (90 days or more) in the near future. When you request for financing, lenders are unaware of your credit risk, so having no credit score or history can be troublesome.

If you have either of these issues (poor credit or no credit), you may have difficulty applying for certain loans or credit cards. For example, premium rewards credit card issuers typically require a solid or exceptional credit rating to apply for a new account. Secured credit cards, on the other hand, tend to feature eligibility requirements that are much easier to satisfy.

4. Refundable deposits

When you open a secured credit card, the cash deposit should be refundable. In some situations, the card issuer or credit card company may allow you, the cardmember, to convert your account to an unsecured credit card after a set period of time (and responsible account usage). Other lenders may allow you to collect your refundable security deposit if you close your account in the future.

Of course, you should keep your account in good standing. Late payments, past-due sums, or other mismanagement of your account may cause the lender to retain some or all of your security deposit.

5. Fraud protections

Credit cards, whether secured or unsecured, are one of the safest payment options available to customers. According to the Fair Credit Billing Act, if someone uses your credit card without permission (and you report the problem within 60 days), your liability for fraudulent charges is limited to $50. Furthermore, most credit card networks offer zero liability policies if you are a victim of fraud or credit card theft.

In comparison, debit cards have less fraud protections. If someone steals your debit card number, the funds will be taken directly out of your bank account until the bank can investigate and resolve the issue. And if you lose your cash, prepaid credit card, or other payment method, the chances of recovering your losses are significantly lower.

6. Earning rewards for your spending

Credit card issuers provide a variety of rewards programs that allow you to earn perks, points, or cash back when you use your credit card. You may be aware that many of these awards are linked to e-commerce websites such as Amazon or Flipkart.

Read Also: The Pros and Cons of Credit Card Balance Transfers

Popular examples include no-cost equivalent monthly installments (EMI) or points on cards issued by banks such as HDFC, ICICI, and Axis Bank. These awards can be redeemed for activities such as travel or shopping. However, in order to make the most out of your card, you must first grasp the conditions of the rewards program and then strategically apply them. This can be an excellent way to save money or gain points on purchases you would have made regardless.

7. Extending your warranty coverage

Some credit card features may not appear to be particularly beneficial until the time comes when you need them the most. One such hidden benefit is an extended warranty, which can alleviate the burden of unexpected repairs or replacements.

Credit card companies frequently provide extended warranties on specific items, which can provide additional protection beyond the manufacturer’s warranty. This is essentially an extension of the product’s existing warranty period. However, it can be a lifesaver in the case of expensive goods where a little problem can result in a significant repair or replacement expense.

For example, imagine your brand-new laptop breaks down within a few weeks of purchase. With an extended warranty, you could easily avoid the expensive repair or replacement costs and get going in no time.

8. Unlocking valuable travel benefits

If you travel frequently, you’ll be pleased to learn that many credit cards provide travel advantages like as travel insurance, miles, access to airport lounges, priority boarding, and concierge services, as well as hotel and airfare savings. Travel credit cards are an excellent resource for frequent travelers or people who enjoy seeing new places. These cards allow you to earn points for every rupee spent, which may then be redeemed for free flights, hotel stays, and other travel-related expenses.

9. Getting emergency assistance when you need it

In an emergency, your credit card can help you get help when you need it the most. For example, suppose you are traveling abroad and your wallet is stolen, leaving you stranded without cash or credit cards.

Fortunately, you can contact your card’s customer support number 24/7 for assistance. The customer care representative may be able to supply you with a temporary credit line and assist you in having a new card mailed to your location. With the appropriate credit card, you can travel the world without stress.

10. Managing your budget more effectively

Using your credit card for regular costs and tracking your spending will help you get a better grasp of your budget and how to manage it successfully. To utilize your credit card as a budgeting tool, keep track of your expenses and establish a spending limit that is consistent with your budget.

Assume you’re attempting to save money and want to keep a closer eye on your expenses. You decide to utilize your credit card for all of your purchases this month and then study your bill at the end to see where your money went. You may notice you’re overspending on takeout or shopping and vow to reduce those expenses for the next month. Leading banks even provide a dashboard with a breakdown of expenditure categories so you may manage your spending patterns.

How Much Money do You Need for a Secured Credit Card?

Secured credit cards, as the name implies, demand a security deposit. Typically, the deposit equals or exceeds the card’s credit limit. Deposits can start as little as $49. However, a minimum of $200 is more frequent. If you have the funds, you can deposit $5,000 or more if the card allows it.

The appropriate security deposit amount for you is determined by your goals, savings, and the cards for which you qualify.

A suitable security deposit amount will vary depending on your financial situation and how you intend to use the credit card. When selecting how much to deposit, you should consider:

• How you plan to use the card: If you need to use a credit card to make travel reservations or get reimbursed for expenses, you may need a credit limit higher than the typical minimum deposit of $200. However, if you are applying for a secured credit card solely to build your credit, a small deposit may help you achieve your goals without requiring you to tie up a larger amount.
• Your financial resources: You will need to consider whether you can do without the cash needed to make a large deposit. If it leaves you so depleted that you have trouble paying off charges, then the security deposit is too high.
• How and when the security deposit will be refunded: Some secured credit cards offer an automatic upgrade to an unsecured card after a certain number of consecutive on-time payments. Be sure you understand fees and the process for getting your security deposit back, whether it’s closing the card or qualifying for an unsecured credit card from the same issuer.

Whether you’re new to credit or have previously battled with credit management, applying for a secured credit card could help you.

Meaningful credit improvement will not occur overnight unless you are extremely fortunate. However, if you continue to manage your credit well, you may be able to qualify for other types of financing in the future.

Conclusion

As previously said, credit cards can provide numerous benefits in addition to making purchases. However, it is important to realize that they can carry dangers and drawbacks, including as high interest rates, hidden fees, and the potential for debt accumulation. Be aware of the following common mistakes: late or missed payments, spending too much of your available credit, or using too many credit cards.

Individuals and businesses should avoid carrying a balance that could result in hefty interest rates and debt at all costs. This can harm your credit score, and lenders may conclude that you are relying too heavily on credit and may be unable to repay your bills.

This may be less of a problem in India than in many other areas of the world, but a CIBIL survey found that nine out of ten Indian credit card users understand how late or non-payment of credit card bills affects their credit score.

Even said, it is critical to emphasize that credit card users must follow excellent financial habits, such as paying their balances on time and in full, avoiding unnecessary expenditures, and using credit cards to achieve their financial objectives. In this sense, they can be an excellent method to establish credit, get incentives, and safeguard your transactions and finances.