Rebuilding credit? Here’s why a secured credit card is your best first step

With how important a good credit score is for loans, favourable interest rates, and even your job prospects, having a high credit score is becoming more and more essential in today's borrowing climate. If you have short or bad credit histories, secured credit cards represent a viable way of establishing creditworthiness.

Understanding secured credit cards

Secured credit cards have the same functionality as a conventional credit card; however, they come with one major distinction: before you receive a secured credit card, you must make a set deposit for security purposes. Usually, secured credit cards will impose a credit limit equal to the amount you deposit; in other words, the deposit provides a back stop for lenders or a spending limit for consumers.

Why opt for a secured credit card?

• Accessibility for all: Unlike unsecured credit cards which require a strong credit score, secured cards are available for those with no credit history or those who would like to improve their credit history.
• Established credit building potential: Responsible use of purchased payments using secured cards will allow credit bureaus to receive notice, and over an extended period of time, you will have established a good credit history.
• Road to unsecured cards: Regular responsible payments may see the secured deposit returned to you and you will become liable for unsecured cards.

Sameer Mathur, Founder and Managing Director of Roinet Solution, explains the advantages of secured credit card, “A secured credit card works like any other CC just that here the credit limit is secured thru FD. By regularly using less than 30% of the total limit and paying on time for a period of 6 to 12 months ensures that the bureau score gets impacted in a positive way. Also, even if there is no bureau score or less bureau score one can still avail a secured card.”

Maximising the benefits of secured credit cards

1. Make payments on time: As you want to establish a good payment history, ensure that all payments and obligations are remitted on or before the scheduled due date.
2. Keep credit utilisation low: As you want to show responsible credit behaviour, keep your balance below 30% of the limit available to you on the card.
3. Monitor frequently: Track your credit score, and report to identify any errors to amend and resolve.

Jai Kumar Co-Founder of TechFini explained it through a relevant example “For instance, Ravi, a 28-year-old gig economy worker from Pune, struggled to access formal credit due to his low credit score of 540. As a freelance delivery partner, his income was irregular, and traditional lenders labelled him as high-risk. However, a digital lending platform offered him a secured credit card backed by a ₹5,000 fixed deposit, providing a crucial opportunity for financial inclusion. Ravi used the card primarily for small, manageable everyday expenses such as mobile recharges and fuel. With automated payment reminders and real-time credit score tracking, he stayed disciplined with repayments.”

“Over the next eight months, his credit score improved by over 100 points. This improvement enabled him to qualify for a small personal loan at a competitive interest rate, and eventually, an unsecured credit card in recognition of his responsible credit behaviour. Ravi’s journey illustrates how a secured credit card can act as a stepping stone toward financial inclusion. It proves that even those considered 'high-risk' or with thin credit files can build creditworthiness when given the right tools, support, and a user-centric platform, he added.”

In conclusion, secured credit cards offer a systematic and effective method for people to rebuild credit. With responsible use and the inherent security of a fixed deposit, people will be able to raise their credit-worthiness, to be presented with enhanced and broader financial capacity.

Disclaimer: Mint has a tie-up with fin-techs for providing credit, you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit score. Mint does not promote or encourage taking credit as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.