The fixed deposit, in this case, acts as collateral on behalf of the account holder, unlike the unsecured credit cards where the bank decides the credit limit of the cardholder on the basis of his/her salary, and credit history.
Credit cards are popularly known for their instant credit facility, because of which people try to get hold of a credit card. With a credit card, you do not need to carry cash all the time, which also becomes convenient. However, everyone is not eligible to own a credit card. Banks turn people down who are new to credit, don’t have a credit score or have a low credit score. An individual’s creditworthiness is decided basis his/her credit score and credit history. Most banks usually have an entire process to determine an individual credit score and whether he/she should get a credit card or not, along with the credit limit and so on.
Alternatively, secured credit cards against fixed deposits (FD) are issued by banks, especially for such individuals who don’t have a credit score. The fixed deposit, in this case, acts as collateral on behalf of the account holder, unlike the unsecured credit cards where the bank decides the credit limit of the cardholder on the basis of his/her salary, and credit history.
Need for Credit Card against Fixed Deposit
Major banks do not generally issue credit cards to those with a poor credit score or credit history. In such cases, one can opt for a secured credit card from the bank.
With a secured credit card, based on the fixed deposit made with the bank, the bank sets a percentage of the FD as a credit limit for the account holder. In this process, when the credit card is issued, the banks mark a lien (as security) on the fixed deposit amount until the card is returned to the bank. Banks normally offer up to 85 per cent of the value of the fixed deposit on the credit card.
Hence, people who are looking to build their credit score from scratch, or the ones with damaged credit score, can opt for this card. Also, individuals with entry-level jobs, retired people with no regular income, and home-makers can opt for this secured credit card.
Having said that, a credit card against a fixed deposit is like borrowing your own money. The fixed deposit with the bank which is linked with the card no longer remains a liquid asset. The bank has the right to take over the fixed deposit in case outstanding dues are not paid, which also affects the account holder’s credit score.
Interest Rate Charged
These credit cards come with the same benefit as any other credit card. However, the biggest advantage they come with is lower interest rates in comparison with regular unsecured credit cards. This is because of the FD deposited with the bank that acts as the security.
The interest rate of secured credit card generally ranges between 28 and 30 per cent, a lot less as compared to unsecured credit cards, which comes with an interest rate ranging from 36 to 42 per cent. This interest rate is applicable only if the customer misses the due date.