In reality, this perception is somewhat incorrect. There are key differences between a secured credit card and a prepaid EMI card, which we will discuss in today’s topic. Let's dive deeper to clarify the misconceptions and understand how secured credit cards actually work.
However, in banking terminology, these are called secured credit cards. A secured credit card is a specialized type of credit card where the customer’s own deposit serves as collateral, allowing the bank to approve a specified credit line. Typically, the approved credit line ranges from 80% to 90% of the customer’s deposit.
How Does a Secured Credit Card Work?
The core structure of issuing a secured credit card is based on the customer’s deposit, which acts as a security against the approved credit limit. For example, if a customer deposits BDT 100,000 as a Fixed Deposit (FD), the bank may approve a credit line between BDT 80,000 and BDT 90,000 against it. This serves as a security guarantee for the customer while minimizing the bank’s risk.
Why Do Some People Mistake It for a Prepaid Card?
Many customers assume that since they are using their own funds, a secured credit card is similar to a prepaid card. However, in reality, it is not. The key differences are:
In a prepaid card, the customer directly uses their deposited funds.
In contrast, a secured credit card provides a credit limit against the deposit, and the bank only adjusts the deposit if the customer fails to repay the borrowed amount.
Differences Between a Regular Credit Card and a Secured Credit Card
When issuing a regular credit card, banks assess the customer’s income and expenses. The following factors are generally evaluated:
1. Monthly income and expenditure
2. Employment status and designation
3. Debt-Burden Ratio (DBR)
4. Credit Information Bureau (CIB) report and credit score
5. Previous loan repayment history
6. Tax-related information
7. Various supporting documents
Customers who do not qualify under these criteria can opt for a secured credit card by using their own deposit as collateral. This provides security for the bank and allows customers to access credit facilities.
Advantages and Limitations of a Secured Credit Card
Advantages of Secured Credit Card?:
Credit Score Improvement: Regular usage and timely repayment of a secured credit card can significantly boost a customer’s credit score.
Additional Benefits: Other perks include EMI facilities, insurance coverage, extended warranties, airport lounge access, international roaming subscriptions, and zero liability payment protection.
Interest Earnings: The deposit used as collateral continues to earn interest or profit at the bank’s predetermined rate.
Financial Flexibility: Customers can freely use their card within the approved limit.
Limitations of Secured Credit Card?
1. Customers cannot liquidate their deposit while holding a secured credit card.
2. The bank blocks the deposit as long as the card remains active.
3. If the outstanding dues are not paid, the bank has the right to adjust the amount from the deposit.
4. Changes to account status, DPS/FD interest mode, or other related modifications are restricted while the card is active.
Should You Opt for a Secured Credit Card?
A secured credit card is a highly secure and risk-free banking facility. It not only provides the convenience of using a credit card but also plays a crucial role in improving one’s credit score for future financial needs. Although some may mistakenly consider it a prepaid card, it is, in fact, a fully functional credit card that helps establish a reliable credit history. If you are unable to qualify for a regular credit card due to insufficient income proof, a secured credit card can be an effective solution. It can enhance your credit score and open doors to future loan opportunities while allowing you to enjoy banking promotions and other exclusive benefits.