What is Secured Credit Card and How Does it Work, Types, Components, Benefits, Features, Eligibility and Documents Required

What is Secured Credit Card?

A secured credit card is a type of credit card that requires the cardholder to place a fixed deposit (also called a security deposit) with the issuing bank. This deposit acts as collateral, reducing the risk for the bank. In India, secured credit cards are often used by individuals who have limited credit history or a poor credit score. Since the deposit guarantees repayment to the bank if the cardholder defaults, banks are more willing to approve applications that might be rejected for traditional, unsecured credit cards. Once issued, a secured credit card functions much like a regular credit card: you can make purchases, pay bills, and build your credit score provided you manage repayments responsibly.

Types of Secured Credit Cards

Standard Secured Credit Card:

• Issued against a fixed deposit (FD) in the same bank.
• The credit limit usually equals 75-90% of the FD amount (for example, an FD of ₹50,000 may give a credit limit of ₹40,000).
• After timely payments for 6-12 months, many banks allow conversion to an unsecured card and release (or adjust) the FD.

Co-Branded Secured Credit Card:

• Offered in partnership between a bank and a merchant (e.g., an airline or e-commerce site).
• The security deposit requirement remains, but cardholders earn additional co-brand benefits (such as airline miles or shopping discounts).

Secured Credit Card with Add-On Facility:

• Some banks allow add-on cards for family members (spouse or children) against the primary cardholder’s deposit.
• Useful for household budgeting and earning rewards on multiple cards while still backing all cards with one security deposit.

Secured Credit Card for Students or Young Adults:

• Designed especially for students or first-time credit-seekers.
• May offer lower minimum deposit amounts (often starting at ₹5,000) to encourage youth to start building credit early.

Components of a Secured Credit Card

Security Deposit:

• The core component. Typically, banks in India mandate anywhere from ₹5,000 to ₹100,000 (depending on the bank and card type).
• The deposit remains with the bank in a fixed deposit or lien form for the entire duration of card usage.

Credit Limit:

• Directly linked to the security deposit. For example, banks may allow 80%-90% of the deposit as the available credit limit.
• After converting to an unsecured card, the deposit is returned or adjusted against outstanding dues.

Annual Fee and Charges:

• Most secured cards have a nominal annual fee (₹200-₹500).
• Interest rates (rate of interest) on outstanding balances are like unsecured cards around 24%-36% per annum if you do not clear your dues by the payment due date.

Reward Structures (if any):

• Some secured cards offer reward points, cashback, or fuel surcharge waivers on spends.
• The rewards may be lower than unsecured premium cards but are still valuable for building good repayment habits.

Credit Bureau Reporting:

• Banks report repayment behavior to credit bureaus (like CIBIL, Experian).
• Timely payments and low credit utilization help improve credit scores over time.

Benefits of Secured Credit Card

Build or Rebuild Credit History:

Since secured credit cards report usage and repayment to credit bureaus, making on-time payments helps establish a positive credit profile. This is crucial in India, where a CIBIL score strongly influences eligibility for loans and other credit products.

Higher Approval Chances:

Even if you are a first-time applicant, a recent graduate, or have a poor credit score, the collateral (security deposit) assures banks. As a result, you stand a much better chance of approval compared to an unsecured credit card.

Controlled Spending:

Because the credit limit is tied to the deposit, cardholders are less likely to overspend beyond their means. It inherently enforces discipline, making it a useful tool for those learning credit management.

Conversion to Unsecured Card:

After demonstrating responsible usage (typically 6-12 months of timely payments), many banks in India allow you to convert your secured card into a regular unsecured card. At that point, the deposit is refunded or adjusted, and you enjoy full unsecured credit privileges.

Access to Credit Benefits:

You receive the convenience and security features of a credit card such as online bill payments, EMI conversions, and access to emergency cash without having to provide an extensive credit history.

Features of Secured Credit Card

Security Deposit Requirement:

• The deposit is refundable (or adjustable) when you close the card after clearing all dues.
• Banks typically place a lien on the FD, meaning the deposit earns interest (if it remains in an FD) until released.

Credit Limit:

• Usually set at 75%-90% of the deposit. If you place ₹50,000, your limit may be ₹40,000-₹45,000.
• Some banks allow a higher limit over time with exemplary repayment history.

Interest Rate and Fees:

• Interest is charged on outstanding balances if you do not pay the full statement amount by the due date.
• Annual fees are often lower than premium unsecured cards; some banks even waive the fee for the first year.

Grace Period:

Typically, 20-50 days from the statement date. If you pay the full billed amount by the due date, no interest is charged on purchases.

Cash Withdrawal Facility:

You can use the credit card to withdraw cash at ATMs, though cash advances carry higher fees and immediate interest charges.

Reward Programs:

• Many secured credit cards offer reward points on spends around 1-2 points per ₹100 spent.
• Points can be redeemed for gift vouchers, statement credits, or airline miles, depending on the bank’s program.

Online Banking and Mobile App Access:

Full access to track transactions, view statements, set payment reminders, and block/unblock the card via the bank’s internet banking portal or mobile app.

EMI Conversion Option:

Larger purchases can be converted into Equated Monthly Instalments (EMIs) at attractive interest rates, allowing for easier repayment.

Security Features:

Chip-and-PIN technology, two-factor authentication for online transactions (OTP), and SMS/email alerts for every transaction.

How Does Secured Credit Card Work?

Opening an Account and Placing Deposit:

• You select your preferred bank and apply for a secured credit card. The bank evaluates basic eligibility (age, PAN, address proof) and asks for a security deposit.
• You place the deposit as a fixed deposit (FD) or lien. For example, if you deposit ₹20,000 and the bank’s policy allows 80% utilization, your credit limit will be ₹16,000.

Using the Card for Transactions:

• Once activated, the secured credit card works exactly like any other credit card. You can make purchases in stores, pay bills online, or withdraw cash at ATMs (at higher fees).
• Each transaction reduces your available credit limit. For example, if your limit is ₹16,000 and you spend ₹4,000, your remaining limit becomes ₹12,000.

Monthly Billing and Payments:

• Every month, the bank issues a statement showing total outstanding balance, minimum payment due, and payment due date.
• If you pay the full statement amount by the due date, no interest is charged. If you pay only the minimum amount (usually 5% of outstanding or a fixed amount), the remaining balance carries forward with interest (about 24%-36% per annum).

Maintaining Deposit as Collateral:

• The bank continues to hold your deposit for the entire tenure of your card. If you default on payments, the bank may adjust your deposit to recover the remaining dues.
• However, banks generally send reminders and communicate before touching the FD, giving you a chance to clear dues.

Conversion to Unsecured Card (Optional):

• After a given period usually 6-12 months of consistent, on-time repayments the bank may offer you an upgrade to an unsecured card.
• Upon acceptance, your security deposit is released (or adjusted against outstanding balances), and you transition to a regular credit card with a higher or similar credit limit without collateral.

How to Use Secured Credit Card?

• Activate the Card: After receiving the card by mail, call the bank’s customer care or follow online instructions to activate. Set your PIN, and register for SMS alerts and internet banking.
• Make Purchases: Use the card at any merchant that accepts Mastercard, Visa, or Rupay (depending on the card network). For online purchases, enter your card details and authenticate with OTP.
• Monitor Your Spending: Regularly check your balance via SMS alerts, internet banking, or the mobile app. Since your credit limit is tied to your security deposit, monitor utilization to avoid maxing out the card.
• Pay Bills on Time: Always aim to pay the full outstanding amount by the due date (usually 20-25 days after statement generation) to avoid interest charges. Even if you must pay in instalments, ensure you cover at least the minimum payable amount.
• Convert Large Purchases to EMI: If you plan a big purchase (e.g., electronics or travel booking), inquire about the bank’s EMI conversion feature. This allows you to spread payments over 3, 6, 9, or 12 months at a fixed interest rate.
• Redeem Rewards: If your secured credit card offers reward points, accumulate them through routine spends (groceries, fuel, utility bills) and redeem when you reach the required points threshold either for vouchers, merchandise, or statement credits.
• Avoid Cash Advances if Possible: While you can withdraw cash up to a certain limit (usually 25% of your credit limit), doing so attracts an immediate cash advance fee and higher rates of interest. Use this only in emergencies.
• Maintain Good Credit Habits: Keep your credit utilization below 30% of your limit whenever possible. For instance, if your limit is ₹16,000, try not to carry a balance of more than ₹4,800. This practice positively impacts your CIBIL score.

Secured Credit Card Eligibility

Eligibility requirements vary slightly among Indian banks, but the common criteria include:

• Age: Applicant must be at least 18 years old (some banks require a minimum age of 21).
• Income Proof: Although the deposit acts as collateral, banks still ask for basic income proof like salary slips, bank statements, or Form 16 especially if you apply for higher deposit amounts or co-branded cards. For student-specific secured cards, a guardian’s income proof may suffice.
• Employment Status: Salaried individuals and self-employed professionals both qualify. Recent graduates without stable income can also apply if they place the required deposit.
• KYC Documents: Valid PAN card, Aadhaar card (or other address proof), and recent passport-sized photographs.
• Credit History: Since the card is secured, banks may accept applicants with no credit history or a poor score. However, certain banks might impose slightly stricter criteria if your credit report shows major defaults.

Documents Required for Secured Credit Card Application

Identity Proof (any one)*:

• Aadhaar Card (UIDAI)
• Voter ID Card
• Passport
• Driving License
• PAN Card (in many cases, PAN is mandatory)

Address Proof (any one)*:

• Aadhaar Card
• Utility Bills (electricity, water, gas) not older than 3 months
• Rent Agreement registered with local authorities
• Passport
• Driving License
• Voter ID Card

Income Proof (depending on deposit amount and bank policy)*:

• Salary Slips for the last 3 months (for salaried individuals)
• Form 16 or IT Returns (for self-employed professionals)
• Bank Statements for the past 6 months (if required by the bank)
• In the case of student or low-deposit cards, a letter from the educational institution and/or a guardian’s income proof.

Photograph:

• Two recent passport-sized color photographs.

Security Deposit Cheque or FD Receipt:

• The bank may ask you to open an FD with them (if your deposit is to be held as an FD) or issue a cheque/debit authorization for the deposit.
• Keep a copy of the FD receipt for your records; the bank will place a lien on that FD.

Application Form:

• Duly filled credit card application form provided by the bank (available online or at the branch).

Signature Verification:

• Some banks may request additional documents as proof of signature, such as a cancelled cheque of your savings account.

Note: Requirements can vary slightly between public sector banks (for example, State Bank of India’s SBI Card), private banks (like HDFC Bank, ICICI Bank), and small finance banks. Always consult the chosen bank’s website or branch for the most up-to-date document checklist.