What is an FD-backed credit card, and how does it benefit you?

An FD-backed credit card is a financial tool directly linked to a fixed deposit (FD). The FD, in this case, acts as collateral and helps the credit card holder secure a credit limit. This way, FD-backed credit cards provide applicants with a safer borrowing experience in comparison with unsecured credit cards.

This kind of credit card is especially useful for those individuals who have limited or no credit history. The primary objective of lending institutions with such credit card products is to keep themselves safe by issuing loans only after confirming with the respective banks about the solid fixed deposit collateral, because without such collateral, no fixed deposit-backed credit card can be issued.

How do FD-backed credit cards work?

When you pledge your fixed deposit to a bank, you gain access to a credit limit. This credit limit generally ranges between 70% and about 90% of the total fixed deposit amount. Further, the fixed deposit remains untouched and even continues to earn interest while serving as security.

If credit card repayments are missed, the bank can recover pending dues by encashing the fixed deposit. In normal circumstances, the credit card functions like a regular credit card for meeting day-to-day expenses and credit card bill payments.

What are the key benefits of FD-backed credit cards?

Some of the key benefits of FD-backed credit cards are discussed below:

1. Easier approval terms due to the collateral, with no requirement for a strong credit score.
2. Continuous interest is earned on the fixed deposit amount, totalling about 6-7% per annum, even with the credit card.
3. Such a credit card can help build or rebuild credit history if the cardholder makes sincere efforts and ensures that all payments are made on time.
4. The applicable interest rates in comparison to unsecured credit cards are lower due to reduced risk. The initial pledge collateral fixed deposit ensures that the overall risk is reduced immensely.
5. Such credit cards also provide holders with lucrative offers, cashbacks, rewards and other associated benefits.

Popular among first-time users and credit rebuilders

These fixed deposit-backed credit cards are ideal for individuals who are new to credit. Especially for aspiring borrowers who are looking to strengthen their credit profile. Hence, for example, if your credit score is 600, you can look to secure a fixed deposit-backed credit card and make repayments on time to slowly but surely rebuild your repayment integrity.

Furthermore, banks and fintechs now provide FD-backed cards with low minimum FD requirements, even with amounts as low as ₹5,000 to ₹20,000. This makes credit more accessible. They also help borrowers with sensible financial lessons in loan and credit management to better equip them to deal with repayments.

Smart savings and credit management

FD-backed credit card permits cardholders to maintain their savings while enjoying credit flexibility. This dual advantage ensures that a fixed-backed credit card can also turn out to be a prudent choice for many aspiring borrowers who want to expand their credit lines and financial opportunities without taking chances with their investment security.

Still, before going ahead with any such financial products, it is sensible to have an honest and fair discussion with a certified financial advisor. So that the pros and cons of credit cards, such as high interest charges, negative implications for credit scores in case payments are missed, hidden charges, possibility of fraud, along with other similar factors, can be properly accounted for before going ahead with such credit cards.

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Disclaimer: Mint has a tie-up with fintechs to provide credit; you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards, and credit scores. Mint does not promote or encourage taking credit, as it comes with risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.