Understanding secured credit cards
Whether you're planning to apply for a quick loan, rent an apartment, or even secure a new job, your creditworthiness has a big part to play in it. One way to build up a good score is the responsible use of credit cards: pay your bills on time and sail towards a better credit portfolio. But there's a catch - not all of us are eligible for these cards as they require a stable source of income and a good credit score. But what if you don't have a regular salary or have a poor credit score? Fret Not!
Enter secured credit cards backed securities such as fixed deposits a powerful tool to help you improve your credit score. In this blog, we'll explore how secured credit cards can be a game-changer for individuals looking to up their credit score and guide them on the path to financial empowerment.
Secured credit cards are a type of credit card that requires a security deposit to be made upfront. The security deposit serves as collateral and determines your credit limit.
1. Building credit
Secured credit cards provide individuals with limited or poor credit histories an easy opportunity to build or rebuild their credit score. By responsibly using and making timely payments on a secured credit card, you can demonstrate your creditworthiness and improve your credit profile over time.
2. Fixed deposit backing
The security deposit required for a secured credit card is in the form of a fixed deposit, similar to the Kotak811 #DreamDifferent Credit Card. This means that the security deposit acts as a collateral against your credit card. The credit limit is set in line with the amount of deposit which is always there in case payments go awry.
What's more, if used well with timely payments, the deposited security continues to earn interest.
Steps to improve your credit score with a secured credit card
Now that we understand the basics of secured credit cards, let's explore some actionable steps that can maximise their potential for improving your credit score:
1. Choosing the right card Matters
Financial responsibility begins with knowledge. It's always best to go through a couple of secured credit card options offered by reputable financial institutions. Look for features such as low or no annual fees, competitive interest rates, and last but not least: the benefits and rewards programs. You can check out the Kotak811 Dream Different Credit Card, which comes with no hidden costs, is free for life and tells you your credit limit upfront. While also providing an excellent opportunity to build credit.
2. Set up a fixed deposit account
Open a fixed deposit account with the required amount to secure your credit limit. You can get going on your Kotak 811 Dream Different Credit Card with an FD as low as Rs.5000. The deposit amount will determine your credit limit, and it will remain intact unless you default on payments.
3. Responsible credit usage
Once you have your secured credit card, use it wisely to maximise its impact on your credit score, irrespective of how much credit limit you have. Here's how:
1. Make timely payments:
Pay your credit card bill, no matter how small or large, in full and on time every month. Timely payments have a positive influence on your credit score and demonstrate responsible credit management. This will build your credit profile over time.
2. Keep credit utilisation low:
Aim to keep your credit utilisation below 30% of your credit limit. This means using a maximum of 30% of the available credit on your card. Maintaining a low credit utilisation ratio shows lenders you manage credit responsibly.
3. Don't default:
Defaulting on payments can greatly damage your credit score and defeat the whole point of using a secured credit card to build credit. Make sure you budget your expenses, account for payments, and avoid unnecessary debt.
4. Monitor your credit score:
Keep an eye on your credit score by checking your credit report about once a month. Credit bureaus and financial institutions provide free credit score monitoring services. Monitoring your progress will help you track your score's progress and identify any errors or discrepancies that may need to be addressed.
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Patience and persistence pay off
Building a solid credit history and improving your credit score does take some time and consistent effort, but it's well worth the effort.
Here are a few extras to motivate you for your credit-building journey:
1. Graduating to unsecured credit cards
As you demonstrate responsible credit usage and establish a positive credit history with your secured credit card, you will become eligible for unsecured credit cards. These credit cards do not require a security deposit and typically offer higher credit limits and additional benefits. Graduating to an unsecured credit card can further boost your credit score and expand your financial options.
2. Maintain good financial habits
Building a strong credit score goes beyond merely using a secured credit card. It's essential to practise good financial habits, period. This includes paying all your bills on time, managing other debts responsibly, and keeping your overall debt-to- income ratio in check.
3. Mix up your credit
Having a diverse mix of credit accounts can positively impact your credit score. Consider adding other types of credit, such as a small personal loan or a line of credit, to your credit portfolio. However, exercise caution and only take on additional credit if you can manage it responsibly, no pressure, ever.
4. Seek professional advice if needed
If you find yourself struggling to improve your credit score or are facing some financial challenges, consider seeking guidance from a financial advisor or credit counselling service. These professionals can provide personalised advice and strategies tailored to your specific situation.
5. Secure credit with credit
Secured credit cards backed by fixed deposits are an effective tool for people without a regular salary or those with a poor credit score to improve their creditworthiness. By responsibly using a secured credit card, making timely payments, and practising good financial habits, you can build a positive credit history and unlock opportunities for future financial endeavours.
Remember, building a good credit score takes time and patience. Stay committed to the cause, monitor your progress regularly, and make smart financial decisions. With determination and the right tools, you can transform your credit score and open doors to a new world of financial possibilities.
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This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. ("Bank") or its employees. Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empanelled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees, and contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.