With the need for financial independence steadily on the rise, managing and making good use of one’s finances has become an integral part of living. Several financial instruments are popularly utilized by individuals to make their money work for them. Among these, credit cards and fixed deposits (FDs) have proved to be exceptionally popular. The concept of a ‘credit card against FD’ is an interesting amalgamation of the two – offering you the benefits of both. Here’s an in-depth look into why choosing a credit card against your FD could be a smart decision.
The Concept of Credit Card Against FD
The credit card against FD is a type of secured credit card that is issued against a fixed deposit account. Simply put, in case of any defaults in payment, the credit card company can recover the dues from your FD account. This makes it a preferable choice for people with a low credit score or those who are unable to furnish substantial income proof, as traditional credit cards often require high credit scores and stable income statements.
Credit Card Limit Based on FD Amount
The credit card limit in these cases is generally 75-85% of the FD amount. For example, if you have an FD of 1,00,000 INR, the credit card limit would be around 75,000-85,000 INR. It is an excellent way of maintaining liquidity while also being able to avail of the credit facilities.
Advantages of Using a Credit Card Against FD
One of the notable features of the credit card against FD is that it allows you to earn interest on your FD even while you use your credit card. The FD continues to earn interest as per the prevailing FD rates and is not affected by your credit card usage.
Calculating Returns with an FD Calculator
Using an FD returns calculator, one can gauge the kind of returns they can expect from their FD investment. The FD returns calculator considers factors like principal amount, FD interest rates, and tenure of investment while calculating the total returns on your FD. Given that the returns earned are risk-free and guaranteed, the credit card against FD becomes a two-way benefit process for the investors.
Considerations and Risks
In case of repayment default, the credit card company holds the right to liquidate the FD to recover the dues. Even then, the primary advantage is that the customer’s credit score may not be impacted as much as it would in the case of a traditional credit card.
Earlier Withdrawal Penalties
However, withdrawing the FD before the maturity date may lead to a termination of your credit card. Also, such a withdrawal attracts a penalty that reduces the interest you earn. Usually, the interest rate on the loan against FD is about 2% more than the FD rate.
Additionally, it’s important to remember that the rate of interest on credit cards against FD is significantly higher. Hence, it’s necessary to be cautious about your expenses and aim to pay off the credit card bill in full every month.
Conclusion
Choosing a credit card against FD offers a range of benefits. It not only provides a secure way of having a credit card, especially for people with lower credit scores but also allows you to earn interest on your FD. Additionally, it can also be a way to improve your credit score by exhibiting financial discipline.
However, it is essential to bear in mind that financial decisions can vary based on personal financial circumstances. Hence, investors must thoroughly consider all the pros and cons before they make their choice.
Summary
Using a credit card against a fixed deposit (FD) can be beneficial in several ways. This option provides a financial instrument to those with lower credit scores, as it relies on security against FD while retaining the ability to earn interest on the FD. Using an FD returns calculator can highlight the gains made during the term of the FD, even as it serves as a backup for credit repayment. It is, however, crucial to remember that the risk of higher interest rates on the credit card and penalties on premature FD withdrawals are significant. Investors must weigh their options carefully, keeping in perspective their financial status before opting for such a card. Any decisions about investing or trading in the financial market should be made after careful evaluation of the risks involved.
Disclaimer:
This article is for informational purposes only and is not meant to provide financial advice. Investors are suggested to consider their financial position, risks, and market volatility before making any investment.