Secured Credit Cards – Repair CIBIL Score

Secured Credit Card is a Blessing in Disguise. Why i said this because Life is unforgiving and so as Poor CIBIL Score / Credit Score. Once an individual is in this sad situation, it is very difficult to come out. A borrower is at the mercy of a lender for CIBIL Score. There is no place for human emotions in the mortgage industry. In many cases, i observed that there was “No” intent of a borrower to default on payment. Such a default is also known as non-willful default. The irony is that both willful and non-willful defaulters are being beaten with same the stick. In case of non-willful default, the intention of a borrower is to clear the dues but he just need a little support to put his financials back on track. Banks and financial institutions treat him like a criminal. In such cases, CIBIL Score can be easily spoiled but it may take years to repair the CIBIL Score. It reminded me of my childhood days. We used to spend hours to build a house from clay, mud etc, but some “bully” kid used to destroy it within few seconds. Same is the case with CIBIL Score. You spent years to build, but it can be destroyed within few months. I am not saying it is only because of a bank but customer is also equally responsible.

We cannot blame or fix 100% responsibility of the banks. As a borrower, we should follow credit discipline and plan for unforeseen circumstances in life. Still it is not possible to foresee every unforeseen circumstance. As i mentioned that banks should be a bit lenient towards the non-willful defaulters. There should be completely different CIBIL reporting mechanisms for non-willful defaulters provided bank is convinced about the same. At the end of the day, too strict credit regime will decrease no of potential borrowers in the system which will impact the business of the banks in the long run. More and more entry barriers will reduce no of potential borrowers. Too much compliance’s are not good for any industry or sector. It kills the sector as such or it may lead to a scenario when almost everyone start flouting the rules. Best example, i can think is of  Value Added Services offered on Mobile. Too many compliance’s / entry barriers killed this golden hen. I subscribed to financial news and stock alert but then stopped using due to double opt in etc. Thankfully, mobile apps replaced the SMS service. The second example is of Wealth Tax, due to too rigid compliance, non-compliance was common. Too strict compliance on credit approval process will kill the concept of credit, it is not good for both banks / financial institutions and growth of the economy. Non-willful defaulters should be treated separately and 2nd chance should be given to the defaulters to repair the CIBIL Score. In my post on 5 Tips to Improve CIBIL Score, i highlighted general tips to improve CIBIL Score. Currently, there are not many options to repair CIBIL Score except Secured Credit Card and few others.

Secured Credit Cards – Fact Sheet

In my opinion, Secured Credit Card is best suited to repair the CIBIL Score. Secured Credit Card can be correlated to Home Loan. As Home Loan is backed by Collateral i.e. Property is Mortgaged similarly Secured Credit Card is backed by Fixed Deposit. One of the misconceptions is that good CIBIL score is required to avail Secured Credit Card. It is not true as Secured Credit Card is backed by security like Fixed Deposit therefore banks don’t check CIBIL Score before they issue Secured Credit Card. In other words, we can say that Fixed Deposit Amount is mortgaged to the banks, therefore, there is no need to check Credit History. Moreover, the risk is very less compared to Home Loan which is high value purchase. Secured Credit Card is also known as Credit Builder by some of the banks. It’s a win-win situation for both banks and the individual. Banks get double business i.e. Fixed Deposit and credit card whereas an individual can build a good credit score. Functionality wise it is as good as Debit Card only i.e. you can only use the money available in your account.

Banks offering Secured Credit Card: ICICI Bank, Axis Bank, SBI Dena Bank etc. SBI Dena Bank card is issued against Fixed Deposit in Dena Bank.

Fixed Deposit Amount: Most of the banks define minimum fixed deposit amount before they issue Secured Credit Card. This amount is Rs 30,000 for SBI Dena Bank Card whereas ICICI bank issue Secured Credit Card with min FD value of Rs 20,000.

Credit Card Limit: Credit limit of Secured Credit Card also vary from bank to bank. ICICI bank offer max credit limit i.e. 85% of Fixed Deposit Value as a Credit limit. Lowest is 50%.

Fixed Deposit Interest Rate: Bank offers interest rate as offered to regular fixed deposits.

Fixed Deposit Tenure: Vary from bank to bank but normally it is 2 years. ICICI bank offers minimum tenure of 6 months

Liquidity of Fixed Deposit: Bank will put a lien on the Fixed Deposit linked to Secured Credit Card. In short, you cannot withdraw Fixed Deposit. In case of a default in payment on Secured Credit Card, Bank will liquidate the fixed deposit to recover the amount due.

Charges: Banks charge joining fees, annual fees, processing etc to issue Secured Credit Card. Please compare the charges before finalizing.

Documentation: For Secured Credit Card, minimum documentation is required. Banks need only identify proof. Income Proof is not required. If you have existing relation with the bank then no documentation is required.

Important Points

1. No Credit History: Not many people are aware that besides CIBIL Score repair, Secured Credit Card can be used to build credit history from scratch. In many cases, loan of a potential borrower is rejected because there is no credit history. In case of “No Credit History”, CIBIL Score will show NA or NH. Banks inform the customer that CIBIL Score is low, but it is not the case. It’s an irony that no one lends, an individual cannot build credit history till someone lend. Therefore, Secured Credit Card will come to your rescue.

2. Use and Pay on Time: Once you get Secured Credit Card, make a point to use it on the regular basis. Most importantly, make all payments on time. Any default on payment can further damage your CIBIL Score. Always make a point to utilize max 30% of credit limit else it shows credit hungry behavior. For example, if your Fixed Deposit is of Rs 1,00,000 and Credit Limit is 85% i.e. Rs 85,000. In this case, never utilize credit card for more than Rs 25,500 i.e. don’t spend more than this amount through credit card

3. Secured Credit Card should be reported to CIBIL: In many cases, i observed that banks don’t report the Secured Credit Card to CIBIL database. In one of the case, a client was using this card for more than a year. After 1 year, he realized that it was not reported to CIBIL. Therefore, it is mandatory to check your CIBIL report after 60 days from the date Secured Credit Card is issued. If the details are not reported to CIBIL then you can request the bank to report the same. If it is not reported to CIBIL then whole objective behind Secured Credit Card is defeated.

 4. Don’t expect overnight results: Yesterday morning i received a call from one of my client. 2 months back, i suggested him to get Secured Credit Card to improve CIBIL Score. He told me that his CIBIL Score is still the same. Summary is that don’t expect overnight results. A good credit behavior followed for 18 months to 24 months will yield the results. Reason being, CIBIL reports the credit behavior which has to be established.

Hope you liked the post !!!

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