The creditworthiness of any individual is quantified by his/her credit score. There are several institutions which compute this score by taking into account several variables, which could slightly differ from one organisation to another. A few standard components used to calculate this score are – past exposure to credit facilities, credit mix maintained, history of all forms of payment, and credit history.
It is a quintessential figure which determines an individuals’ worth as a borrower. When you apply for any form of credit such as credit cards or loans, the lender first inquiries about your credit score. This score ranges from 300 – 900. A score above 750 is considered ideal and to some extent, assures approval of your application.
In case you are a new borrower and do not have substantial score on which you could bank for easy availability of credit facilities, you can start with a secured credit card.
What is a secured card?
A secured credit card follows a similar principle as a secured loan, wherein you have to keep a collateral such as a fixed deposit to avail the card. As lenders are often reluctant to issue unsecured cards to new borrowers, poor credit score is the most common reason why lenders decline credit card requests. That’s why many individuals begin with this option to develop their score from scratch.
How secured credit card can build your credit history?
Here are a few ways how you can use a credit card to improve your credit score –
- Make repayments in time – Secured credit card is an opportunity to prove your creditworthiness as a borrower. Utilise most of this financial tool to make timely repayments on your utilised limit every month, if possible in full. It would develop a rich credit history and significantly improve your score over time.
- Credit utilisation ratio – This ratio represents the amount you have utilised from your credit limit. Experts suggest maintaining a utilisation ratio below 30%, as it reflects well on you as a borrower and shows how you use a credit card wisely. A higher utilisation ratio indicates you as credit hungry individual and thus reflects poorly on your history and score.
Remain cautious of how much of your credit limit you are utilising every month and attempt to keep it mostly below 30% to develop a substantial credit score. If need be, only make a few essential payments using a card, wherein you can earn rewards, to utilise the limit to a minimum.
What are the features of a secured credit card?
The features of a secured card are discussed below –
- Lower interest rate – Like secured loans, secured cards attract a lower rate of interest as the disbursed sum is secured with a deposited amount.
- Minimal documentation – In case you avail a credit card against fixed deposit, you would have to apply with the financial institution with whom you have an FD account. In that case, the documents required will be minimal as your lender would possess most of the essential documents beforehand.
- Credit limit – Your credit limit would be set against your fixed deposit amount. Usually, it stays within 70% – 80% of the sum invested.
When you develop a substantial credit score which shows you as a responsible and creditworthy borrower, you can avail unsecured cards such as Bajaj Finserv RBL Bank SuperCard. Such credit cards come with many benefits that are absent in the secured cards, such as credit card loan which you take against the unutilised amount of your card limit.
Credit cards, more than any other types of advances, acts as an efficient tool to develop your credit history and score. It shows that you are disciplined as a borrower. In that case, you can easily avail credit card loans to facilitate your expenses. It is one of the reasons why credit cards are better than debit cards according to many financial experts.
