A credit card against a fixed deposit (FD) is a practical way to build or improve your credit score. It brings the safety of fixed deposits with the convenience to accessing these card benefits. But do you know how FD-backed credit cards work? In this blog, we will discuss the working principle of these financial products, their benefits and key factors to know before applying for an FD-backed credit card.
What is a Credit Card Against FD?
A credit card against an FD is also referred to as a secured credit card. Instead of assessing your income and a specific credit rating, the card is issued by using the fixed deposit as collateral, on which the bank views the card as a secure loan. Such facilities make the approval of FD-backed credit cards significantly simpler than a regular credit card. Meanwhile, your FD is earning you interest all the time, and you have the benefit of having a credit card and spending power.
How Does an FD-Backed Credit Card Work?
To apply for an FD credit card, you usually need to open a new FD of ₹20,000 or above (or to connect it with an old one). Upon the creation of the FD, the bank determines the limit on the card. The card can be used in the same way as a regular credit card, swiping to buy or pay bills, tickets, or making online transactions.
The payment process is similar to that of regular credit cards. You would have to pay the full amount on the bill, or the minimum each month. When you pay on time regularly, you are not only saving yourself interest charges but also creating a strong credit history. However, the bank can offset the outstanding balance as an FD in instances of default. This gives security to the bank and makes the card a low-risk financing option to them.
Benefits of Credit Cards Against FDs
FD-backed credit cards have a number of benefits that make them stand out, some of them include:
- Simple Approval: The card can be issued with little paperwork, usually without income evidence, simply because there is collateral.
- Credit Building Tool: A consistent and on-time repayment assists in creating or enhancing the credit scores, which can subsequently assist in getting loans or regular credit cards.
- Dual Benefit of Savings: Your FD will continue earning interest even as collateral, which can help your savings to grow.
- Reward Programs: Rewards, cashback and discounts are offered similarly to regular credit cards.
- Emergency Support: The FD-backed structure provides stability and gives assurance in times of unexpected financial requirements.
Who Should Apply?
A credit card against an FD is especially beneficial to those who are new to credit and would like a secure way to begin. This option is used as an entry point by students or young professionals who are beginning to build their creditworthiness. This choice is also attractive to those who are conservative in their spending and wish to have restrictions based on savings as opposed to open-ended credit. When you tie the card limit to an FD, you are able to spend within a specific range.
Final Thoughts
An FD-backed credit card is an opportunity to use the convenience of a credit card and earn interest on your savings. It is ideal among people who are first-time credit builders or those who want controlled access to credit. With this financial option, you can improve your financial position by paying bills promptly and monitoring your monthly expenses as your deposit keeps growing in the background