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If you have Low Cedit score - Use asset-backed (secured) credit cards



Asset backed credit score can help you to build your credit repayment history, which in turn helps you to improve your credit score over a medium term.

The credit card penetration in India has been dismal, reaching just 21 million in 2014-15. The primary reasons for this snail-paced growth are tough standards and filters used to issue cards to credit-worthy applicants. You can be denied a credit card based on your credit score, low or irregular salary, among many other reasons. In such cases, an asset-backed (secured) credit card can come to your rescue.

Banks offer secured credit card against fixed deposits (FDs) opened with them. These credit cards are called secured because banks can close your FD in case you default on bill payments. These FDs, in turn, are lien marked and therefore, you cannot close them as long as you hold the secured credit card issued. Usually, banks provide up to 85% of the FD as the credit limit. Secured credit card works like a normal credit card while you continue to earn interest on your fixed deposit. If you fail to pay your card bills, the bank has the right to liquidate the FD and recover debts.

Who should opt for such credit cards?

Individuals, whose credit card applications have been rejected because of:

•Having low credit score
•Being self-employed or unemployed
•Not meeting the income criteria of the respective bank
•Residing in blacklisted areas
•Being employed with blacklisted companies

Advantages:

1.Improvement in credit score: People with bad credit score can use a secured credit card to improve their credit score by regularly using the card and paying the bill.

2.Building credit history: If you are not yet part of the credit system, a secured credit card can pave the way forward. Besides having a savings account, it is important to have some type of debt component, such as a credit card, in your portfolio as when you later apply for a loan you may benefit from a lower interest rate.

3.Earning interest on FD simultaneously: Even if you are using your secured credit card, you will continue to earn interest on your fixed deposit.

4.Increased liquidity: Secured credit card can help in avoiding premature closure of fixed deposits if you are in need of urgent cash.

5.Increased credit limit: Secured cards can also help increase your credit limit instantly. For instance, credit limit of your current credit card is Rs 50,000, and you want to increase it to Rs 1,50,000. In such a scenario, you can avail a secured credit card without waiting for the bank to increase your limit on the current card.

6.Minimum documentation: Secured credit cards require very few documents when compared with usual credit cards and the processing is often quicker.

Disadvantages:

•As your FD is no longer a liquid asset, you cannot close it as long as you have the credit card.

•Any default in payment will again downgrade your credit history.

Providers of FD-backed credit cards

Very few banks in India offer secured credit cards despite the lower risk of default. Banks usually focus on unsecured credit cards because of higher revenues from interest and other charges. Let's compare features of secured credit cards currently available:

 

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