Credit cards secured against fixed deposits (FDs) offer a unique way to build or improve your credit score. When you apply for a credit card online, especially a credit card against FD, you provide a safety net for the issuer. This type of credit card is backed by the funds in your fixed deposit, which minimises the risk for the bank. This article will explore the advantages and disadvantages of using a credit card secured against an FD, helping you decide if it’s the right choice.
Advantages of Credit Cards Secured Against FDs
Here are some benefits of securing a credit card against FD:
1. Easier Approval Process
One of the primary benefits of a credit card against FD is the easier approval process. Since the card is backed by your fixed deposit, banks are more likely to approve your application even if you have a low credit score or no credit history. This makes it an excellent option for students, new earners, or individuals with poor credit histories who are looking to build or rebuild their credit.
2. Lower Interest Rates
Credit cards secured by fixed deposits generally have lower interest rates than unsecured credit cards. The collateral reduces the risk for the bank, allowing them to offer more favourable terms. This can lead to significant savings, especially if you tend to carry a balance on your credit card from month to month.
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3. Building Credit Score
Using a credit card against FD responsibly can help improve your credit score. Regular, on-time payments are reported to credit bureaus, positively impacting your credit history. Over time, this can lead to a higher credit score, making it easier to qualify for other types of credit in the future, such as Personal Loans, Car Loans, or unsecured credit cards.
4. Flexible Credit Limit
The credit limit on a secured credit card is often linked to the amount of your fixed deposit. This provides flexibility as you can choose a credit limit that suits your needs. If you want a higher credit limit, you can simply increase the amount of your FD. This is particularly useful for those who require a higher credit limit for specific financial needs.
5. Continued Earnings on FD
Even though your fixed deposit is used as collateral, it continues to earn interest. This means you can still benefit from the interest income generated by the FD, making it a dual-benefit financial tool. Your money remains invested and grows while you simultaneously build your credit profile.
Disadvantages of Credit Cards Secured Against FDs
Let us look at some disadvantages of securing credit cards against FD:
1. Locked-In Funds
One significant disadvantage is that your funds in the fixed deposit are locked in and cannot be used for other purposes. If you need access to this money in an emergency, it might not be immediately available, which can be a drawback compared to more liquid financial tools.
2. Limited Credit Limit
The credit limit on a secured credit card is usually a percentage of the fixed deposit amount, often up to 90%. This means your available credit might be lower than what you could get with an unsecured credit card, especially if your FD amount is relatively small.
3. Potential Fees and Charges
Some banks may charge additional fees for issuing a credit card against a fixed deposit. These can include application fees, annual fees, or processing fees. Understanding all the associated costs before applying is important, as they can reduce the overall benefit of the lower interest rates.
4. Risk of Losing FD
In the event of default, the bank has the right to liquidate your fixed deposit to recover the outstanding dues. This not only results in the loss of your FD but can also impact your financial stability. It’s crucial to manage your credit card usage responsibly to avoid such situations.
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Benefits of Applying for a Credit Card Online
Here’s why you should apply for a credit card online:
1. Convenience and Speed
Applying for a credit card online is quick and convenient. You can complete the application from the comfort of your home or office and often receive quick approval based on the details you provide.
2. Instant Documentation
Applying online often allows for instant submission of required documents. You can upload scanned copies of your ID, address proof, and other necessary documents directly to the bank’s website.
Conclusion
A credit card against your FD offers an excellent opportunity to build or rebuild your credit score with a relatively low-risk financial product. By leveraging your fixed deposit, you can enjoy the benefits of a credit card, such as easier approval and lower interest rates. However, it’s important to consider the potential disadvantages, such as locked-in funds and limited credit limits. Before you apply for a credit card online, ensure you understand all the terms and conditions to make an informed decision.
