Avoid These 4 Habits While Using a Secured Credit Card
Like a secured loan, a secured credit card requires you to pledge a fixed deposit as collateral in order to secure credit. Secured credit cards are perfect for applicants with poor credit scores or first-time credit card users as they can use them to safely build their credit scores.
If you fail to repay the debt on a secured credit card, the lender can take possession of your deposits. That is why it is important to take a few precautions before opting for a secured credit card. Read along to know what these are.
4 Habits You Must Avoid While Using a Secured Credit Card
Credit cards can be an excellent financial tool if you have ample awareness of how you can use them. Follow the section below to learn which habits to avoid to add maximum value to your credit card purchase.
- Defaulting on Loan Repayments
Missing out on credit card bills comes with a stiff price, especially on your credit score. Missing out due dates may flag your credibility as a borrower. Furthermore, secured credit cards do not require the borrower’s credit history; hence, they are considered high-risk investments.
Most importantly, banks have the legal right to claim possession of your submitted collateral, which may put you under a financial burden. Therefore, you must only apply for credit card purchases which you can afford to repay.
You can contact your lender or seek internet banking services to set a transaction limit on your credit card so that you never exceed the credit utilisation ratio. Remember that you should never avail more than 30% of your credit limit, to keep a healthy credit score.
- Paying the Minimum Credit Card Due
While seeking a secured loan, the lender may give you two debt repayment options namely, paying the total credit statement or paying the minimum amount due. This is only to provide more flexibility to borrowers in case they fall short on funds before the billing cycle.
Only paying the full credit bill at the end of a billing cycle is recommended. If you opt to pay the minimum due, the remaining credit card balance will get added to your next billing cycle and so on. You also would become liable to pay a hefty interest and other penalties on the outstanding balance. Eventually, the debt repayment will become extremely inconvenient for you.
- Availing EMIs via Credit Cards
Cardholders get the option to break their large purchases into smaller EMIs which are added to their monthly billing cycle. This way, they can avoid paying a large bill at once, which would have abruptly deducted their savings. Borrowers can instead register the purchase on their secured credit card and repay when they have enough cash flow at their disposal.
However, like stated before, you must only avail what you can afford to repay. Therefore, make sure your finances allow you to fund the EMIs efficiently. Otherwise, if you miss out on EMIs, you will be liable to pay the applicable interest and penalty amount.
- Not Reviewing Your Credit Card Statement Regularly
A credit card statement includes information about the cardholder and their past credit card transactions. Therefore, you can avail your credit card statement to check for any discrepancies. Furthermore, there may be hidden charges levied on your credit card expenses.
Checking if you have been charged reasonable fees for credit card services is essential. You should be wary if there has a considerable drop in your credit score without any valid reason. If you spot any discrepancies or erroneous statements, you can contact the concerned credit information bureau and raise a dispute.
Credit card frauds are on high rise in India. Hence, if you detect any illegitimate transaction which you did not make via your credit card, you should immediately flag the issue to the concerned authority.
Here are some bonus pointers which you should also keep in mind while using a secured credit card.
- Maintaining Unnecessary Credit Cards
Borrowers with multiple credit cards often find it difficult to manage their billing due dates. This is because every credit card they own has distinct liable charges associated with it. Some of the charges levied on secured credit cards include annual charges, outstanding debt penalties and interest amounts accumulated on late payments, etc.
The accumulated charges on your secured credit card can become considerably high, making it more cumbersome for you to maintain multiple credit cards. Therefore, you can always close some of your credit cards by paying off the outstanding balance. In this way, you can ensure that you do not fall into financial liabilities which may take away your pledged deposit.
If you feel like any of your secured credit cards do not add maximum value to your expenses, you can also transfer your balance to another lender and close the existing account. Then, you can negotiate for a lower interest rate and more favourable loan repayment terms with the new lender.
- Frequently Withdrawing Cash from ATMs
Borrowers can use secured credit cards to withdraw cash from ATMs. However, just like any other credit card, this facility carries a high-interest rate and cash advance fee. Furthermore, what makes it worse is that in most banks the interest rates on the cash withdrawal amount are taken into consideration from day one. Therefore, failing to repay your cash advance fee can invite high-interest rates and penalties.
Therefore, you should avoid withdrawing cash funds via secured credit cards, unless necessary.
Properly utilising your secured credit card can help you reap several benefits. For example, you can earn interest on the collateral you provide to the lender against a secured credit card. This opens room for earning profits from your deposits while you enjoy the perks and benefits of using a credit card. Moreover, people with low credit scores can recover their credit ratings using a secured credit card.
Frequently Asked Question
Who should apply for a secured credit card?
Secured credit cards are usually used by people with low income or credit scores. For example, housewives, retired individuals, individuals with no valid income proof and people who are ineligible for unsecured loans, etc., are eligible for secured cards.
Do secured credit cards have a high chance of approval?
As secured credit cards are approved against collateral, lenders do not require a stringent background check to determine the credibility of the borrower. As a result, credit card approval is comparatively simpler and easier.
Do I get a grace period for secured credit cards?
Yes, most lenders provide a grace period on secured credit cards. Therefore, borrowers can align their due dates with the grace period to make the most out of their credit card usage.
What are the cons of using a secured credit card?
The credit limit offered on secured credit cards is comparatively lesser than that of an unsecured credit card. Furthermore, most importantly, lenders can claim your pledged security in case you fail to repay the credit card debt.