Credit cards have become an indispensable part of modern Indian life. But, do you have a limited credit history or are you seeking a secured option? If yes, obtaining a traditional credit card can be challenging. This is where the concept of a “credit card against FD,” also known as a secured credit card, comes into play. But before diving in, it’s crucial to understand this product.

What is a Credit Card Against FD?

The Reserve Bank of India (RBI) regulates credit card issuance in India. Banks can offer credit cards against fixed deposits, adhering to specific regulations. Here’s the core principle:

  • You deposit a fixed deposit (FD) with the bank for a specific tenure.
  • The bank issues you a credit card with a credit limit ranging from 75% to 90% of your FD amount. This depends upon RBI’s credit card risk management framework.
  • The FD acts as collateral, securing the credit line extended by the bank.

Benefits of a Credit Card Against FD

  • Accessibility in case of limited credit history: This product benefits those who are new to credit or have a thin credit file. However, it’s crucial to use the credit card responsibly and make timely repayments.
  • Building Credit Score: Every on-time payment you make on your credit card against FD reflects positively on your credit report. This gradually improves your credit score. A good credit score can unlock better interest rates and offer other financial benefits in future.
  • Convenience and Rewards: A credit card against FD functions like a regular credit card. Here’s a look at all that you can do:
    • Make purchases
    • Avail of reward programs offered by the bank (subject to bank’s terms and conditions)
    • Enjoy cashless transactions.

Understanding the Key Features

  • Credit Limit: The credit limit on a credit card against FD is usually a percentage (75-90%) of your FD amount. Thus, you need to adhere to the spending limit decided by the bank.
  • Interest Rates: Interest rates on credit cards against FD can vary. This can depend on the bank, your creditworthiness, and the tenor of your FD. Typically, they are higher than interest rates on regular credit cards.
  • Applicable Fees: Some banks might charge a fee for using a credit card against FD. Compare fees and interest rates offered by different banks before making a decision. This ensures you get the most cost-effective option.

Who Can Benefit Most from a Credit Card Against FD?

This product caters to a specific segment of borrowers, as listed below:

  • If you’re new to credit, the credit card against FD can help you build a strong credit profile. However, remember to use it responsibly and make timely payments to reap the benefits.
  • If your credit score is low, use this product to improve your creditworthiness over time. Responsible credit behaviour is key here.

Before You Apply: Important Considerations

While a credit card against FD offers several benefits, it’s essential to be financially aware before applying:

  • Interest Rates: Interest rates on credit cards against FD tend to be higher than regular credit cards. Ensure you understand the interest rate structure. Also, calculate potential interest charges before applying.
  • FD Lock-in Period: The FD you deposit acts as collateral and gets locked in for the tenure of the credit card. This means you cannot access your funds until the credit card is surrendered or the balance is fully repaid.
  • Annual Fees: Compare annual fees charged by different banks to find the most cost-effective option.
  • Alternatives: Explore other options like secured loans or become an authorised user on someone else’s credit card. Consider these alternatives based on your financial situation.

Making the Most of Your Credit Card Against FD

Obtaining a credit card against FD can be a bridge to building a positive credit history and unlocking the benefits of credit cards. Here are some key tips:

  • Develop a Budget and Stick to It: First, create a realistic budget and track your expenses. Spend what you can repay within the billing cycle to avoid paying high-interest charges.
  • Timely Payment of Your Bills: Consistent on-time payments can help build a good credit score. Late payments can damage your credit report and lead to hefty penalties. Automate your payments, to ensure timely repayments.
  • Monitor Your Credit Utilisation Ratio: Aim to keep the percentage of your credit limit utilised below 30% for a healthy credit score. Regularly monitor your credit card statements and adjust your spending habits if needed.
  • Avoid Cash Advances: When compared to regular purchases, cash advances on credit cards can have higher interest rates. Utilise your credit card for planned purchases and avoid these, whenever possible.
  • Don’t Exhaust Your Credit Limit: While it’s tempting to spend up to your credit limit, resist the urge. Maxing out your credit card can adversely affect your credit score and make it difficult to manage your finances.
  • Review Your Credit Report: Keep a tab on your credit report from credit information bureaus. Regularly monitor the report for any errors or inconsistencies, so you can promptly report such cases to the credit bureau.

Building a good credit score takes time and consistent effort. Using your credit card against FD responsibly shows your ability to manage credit effectively. This paves the way for a brighter financial future.