Secure your credit, lower your expenses
A secured card is an excellent option if you want to reduce your credit card expenses, rebuild your creditworthiness or if your credit card application has just been rejected.
It’s likely that you have a fixed deposit (FD) in one bank or another. It’s a convenient option for many of us, even though your CA might advise you against it. While you’re ignoring his advice, though, why not use the fixed deposit to lower your credit card bills? After numerous credit card bills went unpaid around five years ago, banks first became selective about new cardholders and later started to issue secured cards. These cards, issued against an FD, offer much lower rates and charges than credit cards while ensuring the same benefits. We explain what they’re all about, the rates and charges on offer and when to consider them.
How they work? Credit cards are unsecured loans, as banks don’t ask for any collateral on issuing the card. This is part of the reason why interest rates on them are so high. Secured loans are, however, offered against an FD with the bank. With State Bank of India (SBI), for example, you need just top open an FD of a minimum of Rs30,000 and you’ll immediately be given a secured card with a credit limit of up to 90% of the FD.
Are the features different? Not at all. You get the same features as you would with any credit card. The interest-free period will be 20-50 days, you can swipe your card online and at physical stores, you can convert payments to EMI, and whatever else you can do with a credit card.
Is it for me? Secured card are mainly advertised as a means to rebuild your credit score after a bad patch or if you are a student with no credit history. This is because they show lenders that you are responsible with credit and are capable of financial planning. But they’re also an easy way to save money as their charges are lower, even though the benefits are the same as that of a credit card. Furthermore, in case of an emergency, you have the option of quick, cheap credit.
How much cheaper? The rates of interest on a secured card are always lower. For example, with Axis Bank, the rate of interest is 1.95% per month with its secured card, but 3.35% with its credit card. But even if you don’t plan on using the credit, you’ll find that the charges are lower. With Kotak’s Aqua Gold card, for example, you can also get interest-free credit on a cash withdrawal. On the other hand, cash withdrawals with your credit card are taken as personal loans, so interest is charged the moment you withdraw. Many other fees are waived or lower. With some cards, there are no annual fees, with others there is no card replacement fee and low penalty charges on overspending.
Are offers different? The points system and offers on these cards are comparable with regular credit cards offered by the same bank. You earn reward points as you spend and get access to the same discounts as cards in the same range. In fact, banks include secured cards on the same page as their credit cards.
What about the FD? The FD will continue to earn interest at the rate the bank is offering. To keep the card going, you can simply renew the card. You don’t have to be an account holder to get it, just have an FD. So you could simply get a card from a bank that is offering the best interest rate on FDs (see table below).
|Secured card||Interest rate||Minimum FD||Credit limit||Joining fee||Annual fee||One-year FD rate|
|SBI Dena Bank Secured Card||1.99%||Rs30,000||90% of FD||Nil||Rs250||8.75%|
|Axis Bank Insta Easy Credit Card||1.95%||Rs20,000||85% of FD||Rs500||Nil||8.50%|
|ICICI Bank Instant Titanium Credit Card||2.49%||Rs20,000||85% of FD||Nil||Nil||7.50%|
|Kotak Aqua Gold Card||2.99%||Rs25,000||80% of FD||Nil||Nil||8.75%|
Can you be rejected? No, in fact they are issued on-the-spot. As the credit you’re asking for is secured by an FD, you can’t be rejected. Your monthly credit limit will be up to 90% of amount you’ve deposited with the bank. While this may be reduced if you don’t repay your bill on time, hopefully you understand the costs associated with any form of credit that comes with plastic.