FD-Backed Credit Cards: Many individuals face difficulties obtaining a credit card because their CIBIL score is poor. However, for those who still wish to acquire a credit card, banks often recommend an FD-backed credit card. This option is generally considered both secure and convenient. But is it truly risk-free? You can easily understand this concept. How does this card work, and what precautions must be taken when using it? You can find all the essential details related to this in the article below.
What is an FD-Backed Credit Card?
You will be pleased to know that this type of card is entirely based on your Fixed Deposit (FD). Simply put, when you deposit a specific amount in the bank, the bank treats that deposit as collateral and issues you a credit card against it. Typically, your credit limit is set at 75% to 90% of your FD amount.
For example, if you have made an FD of ₹1 lakh, you could receive a card with a credit limit ranging from ₹80,000 to ₹90,000. This serves as a boon for individuals who lack sufficient proof of income or whose credit scores are significantly low. Note that FD-backed cards offered by different banks are not all identical.
Some banks offer attractive reward points and other incentives on these cards. Conversely, others may issue very basic cards while still charging the full annual fee. Therefore, before applying for such a card, it is essential to carefully review its features and associated fees.
Why Do People Choose It?
Easy Approval – Did you know that since your FD is already deposited with the bank as security, they can issue the credit card to you immediately and without any hesitation?
Helps Improve Credit Score: Paying your bills on time helps improve your credit score. This proves to be extremely beneficial when applying for a home loan or car loan in the future.
Control Over Spending: Since your credit limit is directly linked to your savings (your FD), it helps prevent you from spending beyond your financial means. Points to Keep in Mind
Did you know that, even though this card may seem secure, certain aspects of it could end up weighing heavily on your wallet?
High Interest Rates: Many people assume that since the card is backed by a Fixed Deposit (FD), the interest rates will be low. However, if you delay paying your bills—just like with other credit cards—you could face hefty annual interest charges ranging from 30% to 40%.
Understand the Discrepancy Between FD and Card Interest Rates
While you might be earning an interest rate of around 6% to 7% on your underlying FD, you could be paying over 30% interest on your outstanding card balance. This significant disparity can result in substantial financial losses for you.
Locked-in Funds: As long as your credit card remains active, you cannot prematurely withdraw or break the associated FD. This means that, even in the event of an emergency, you will be unable to access or utilise those funds.
