FD-Backed Credit Cards: The Ultimate Guide to Building Credit and Managing Expenses

Last Updated : Aug. 14, 2023, 1:46 p.m.

Credit cards are well-known for their financial flexibility, discounts, and other offers. Whether you wish to shop or purchase electronics using a credit card, you can handle any transaction. Suppose you are a beginner investor or someone who just got a job after completing your studies and has no or low credit history. In that case, you can apply for an FD-backed credit card to boost your credit score. But certain risks are attached to the card, which you must tackle before opting for it. If you successfully handle the risks, you can make the most out of the cards. Want to know more about the risks involved in an FD-backed credit card? Let’s see the risks attached to such credit cards.

What are FD-Backed Credit Cards?

Before learning about the risks of a fixed deposit-backed credit card, let’s understand what an FD-backed credit card is. A fixed deposit-backed credit card has specific predefined ancillary terms and conditions. You should open a fixed deposit account with the issuing banking institution to obtain the card. You will earn interest on your fixed deposit account according to the mentioned interest rate and period. Your fixed deposit will automatically renew until you surrender the fixed deposit-backed credit card .

Such credit cards are viable options for individuals, including people belonging to Gen-Z who have zero credit history. FDs act as an assurance based on which banks agree to issue a credit card. Banking and other financial institutions do not check income security or credit score and history to issue such credit cards because they are secured against the fixed deposit account.

Individuals with no or low credit history find it challenging to get a credit card. Opting for an FD-backed credit card will help you fix your credit score and report. It acts as collateral for banks that issued the credit card, and the underlying fixed deposit ensures you earn interest. The risk of losing the fixed deposit reminds you to take control of your spending habits.

Risks Associated with Fixed Deposit-Backed Credit Cards

Even though an FD-backed credit card has many advantages, such as boosting credit scores, reward points, breaking down big expenses, overcoming emergencies, etc., there are certain risks that you should handle before opting for one. So, what are the risks involved with credit cards against fixed deposits ?

The risks associated with fixed deposit-backed credit cards are as follows:

• High finance fees in contrast to unsecured credit cards if you miss paying the dues on time.
• You can only retrieve your fixed deposit amount once you pay the last rupee of your credit card.
• Lack of diversified options, fewer discounts, and other offers on fixed deposit-backed credit cards in contrast to regular ones. Many credit card issuing companies offer various unsecured credit cards, which target customers and their spending habits, such as rewards, co-branded, fuel, shopping, travel, and premium credit cards.

Although credit cards help ease transactions, you can fall into debt if you are not cautious. Use the cards judiciously. An expensive debt and non-payment can put you in trouble. The interest rates on credit cards against fixed deposits can be as high as 20% or above, based on which bank issued you the fixed deposit-backed credit card.

Banks offer credit cards and personal loans to eligible individuals as the first credit line. Opting for and using an unsecured credit card is effortless. Nonetheless, paying off dues on time is vital. Suppose you clear your dues in full and on time. In that case, your credit score will start rebuilding. If you pay late, your credit score will begin decreasing.

You can remember that when you use the FD-backed credit card, you can not use the amount you deposited in your fixed deposit account because it will be under linen. Suppose you need to be more prudent about how you spend your purchases. In that case, you will put your deposit at risk. If there is a default, the bank that issued the credit card will terminate your fixed deposit account. The issuing banking institution will recover the dues. If there is any balance, the bank will return the same to you.

Conclusion

An FD-backed credit card is common and helps you rebuild and improve your credit score. It is necessary to manage the daily expenses and repay them later. You will become responsible for your necessities through it. The management of an FD-backed credit card depends on the cardholder. Generally, people with no or lower credit scores opt for such credit cards to rebuild their credit card profile. If you have started building your credit score, you can opt for the card, but like everything else, it also has some risks. Analyse the risks carefully before opting for a credit card against fixed deposits.

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