An imperfect credit profile can affect one’s ability to secure a loan. If you have financial black marks on your report due to late payments, defaults or foreclosures you need to work on your profile and re-establish credit. Getting new credit and managing it responsibly is the key to rebuild a bad credit history. But it’s easier said than done. Most creditors shy away from lending to people with black marks on their credit report. So does that mean that your past credit mistakes will continue to haunt you forever? Does it imply that people with a bad credit score do not stand a second chance? Absolutely No.
A secured credit card can help you improve credit score and rebuild your credit. A secured credit card is similar to a regular credit card where you have a specified credit limit. You swipe your card to make purchases and repay it either all at once or through monthly payments. The major difference in a secured credit card is that you are required to make a security deposit which serves as collateral and covers the bank’s risk in case you default. If for some reason your payments are late or insufficient, the bank can dip into this deposit to recover the dues. Since the collateral secures the bank’s money against any bad credit behaviour, most banks issue these cards without a CIBIL score check. The security deposit does not earn any interest. Your credit limit is based on the amount of deposit you make. It is usually equal to or less than the cash deposit. For example if you make a deposit of say Rs 70,000 you may start with a credit line of around Rs. 50,000. With responsible credit use you may eventually get a credit line increase. Many credit card companies increase your credit limit after 6-12 months of on time, consistent repayments.
Do not confuse a secured credit card with a debit card. Firstly the security deposit does not count towards the payment of purchases. It is only a collateral and you need to make monthly payments against the charges that you make to the card. Secondly debit card usage information is not reported to the bureaus. The usage of a secured credit card on the other hand affects your credit score.
Here is how you should use your secured card to improve credit score and build a positive credit history.
1. You need to charge something to the card and pay it off to show that you are a responsible user. So use the card every month. Keep the purchases small so that you can be sure to pay it off at the end of the billing cycle. Don’t use the card to create debt. If you cannot afford to pay for a purchase, it is better not to charge it.
2. Use only a small portion of the available credit line every month. An important component of the credit score is the utilization percentage. A low credit utilization rate helps to improve credit score. If you max out your card’s spending limit each month it reflects that you are overly dependent on credit. Such a credit behaviour can have serious negative consequences on the credit score.
3. It is necessary to maintain a strong record of on time payments if you wish to improve credit score. Payment history is in fact the biggest factor that contributes to building your credit. The best way to ensure that you never miss a payment is to set up payment alerts on email or mobile or arrange for automatic monthly debits.
You can obtain a secured credit card without a CIBIL score check. But like any other financial product, a secured credit card comes with a fee. So compare the interest rate, application fee, processing fee etc. and shop around before you select your card. Responsible use of a secured credit card gives you an opportunity to re-establish your credit history. When the bank reports your spending and payment patterns to the credit bureaus, that information gets recorded in your credit report. Good credit habits and timely payments improves credit score over time. Once you gain a better footing you can request the issuing company to convert your card into a regular credit card. You will then get your deposit back in your pocket.