There are people who default on loans and taint their credit history unknowingly. By the time they realize the importance of CIBIL rating their score has already dipped to the point where no lenders agree to give them credit. They find themselves in a sticky situation where it is virtually impossible to get loans because of low score; and they do not get a chance to demonstrate that they have now become serious about servicing their obligations. Another set of people never took credit in their life. Since there is no proof of how they handle the loans they do not have any CIBIL rating. If at any point in time they do have a requirement of loan, lenders in all likelihood will reject the application. No matter how responsible they might be, without any proof of creditworthiness lenders will not trust them.
Secured credit card is a good option for people in any of the above situations who are looking to improve their CIBIL score to enhance their chances of loan approval. In all respects it is used as a normal credit card, the only difference being that it is issued against a Fixed deposit. You make a fixed deposit with a bank, and the bank issues a secured credit card. The credit limit is usually a percentage of the amount of fixed deposit kept with the bank. Since banks do not have any risk in issuing such cards, they are much easier to acquire. Banks do not check the credit score before issuing these cards. So if your application for a normal credit card got rejected because of a bad score, it is better to go for secured cards rather than applying for unsecured credit cards with multiple banks and reduce your score further.
The rate of interest charged on the outstanding balances on these cards is also much lower as compared to unsecured credit cards. Like any other card the borrower will be required to make a payment before a due date. He can pay the full amount or at least the minimum required to be in good credit standing. If in case the borrower defaults on the payments bank can use the fixed deposit to recover their dues. Hence the risk of the bank is minimized.
If the borrower pays all the dues diligently before the due dates then he can boost his credit records over time and enjoy a high CIBIL rating. Also, since he can spend only as much as he already has in a fixed deposit he will not incur more debt or fall into a debt trap.
When you apply for a secured credit card make sure that the bank reports the payment details of the secured card to the credit bureau. Only if it is done will you be able to achieve your goal of improving the CIBIL rating. Check your credit report after a 2 month usage period to see whether the repayment history has a record of the secured loan. Also just don’t keep the card locked in the almirah. Use it for small purchases every month and repay the amount in full each month. This way you will be able to demonstrate that you are consistent and responsible in clearing your dues. Never miss a payment to show that you are committed to become a credit worthy individual. Try not to spend more than 35% of the available credit limit. Maxing out the limit each month shows a credit hungry behaviour and is not good for your score. Such habits will go a long way in increasing your CIBIL rating over time
So whether you want to mend your past mistakes and raise the CIBIL rating or you want to build a credit history from scratch, secured credit cards is the way to go. It is an extremely valuable tool and when combined with patience and punctuality, it can do wonders for your CIBIL rating.