The Pros and Cons of FD Credit Cards: Understanding Their Impact on Your Credit Score
Last Updated : Aug. 10, 2023, 3:46 p.m.
Are you interested in owning a fixed deposit credit card but worried about its impact on your credit score? Please keep reading to understand what a fixed deposit credit card is and the impact of FD credit card on your credit score.
Fixed deposit credit cards are secured credit cards that use fixed deposit accounts as collateral. The credit limit of these cards is typically around 80% to 90% of the fixed deposit amount, and the deposit continues to earn interest even after the credit card is issued. These credit cards enjoy lower interest rate charges compared to unsecured credit cards, making them popular among credit card holders who want to save on their usage charges. The impact of FD credit card on the credit score of the fixed deposit holder has been explained in detail in this article.
Impact of FD Credit Card on Credit Score
The impact of FD credit card on the cardholder’s credit score depends on how they use it. Using the card wisely and responsibly can improve the credit score and build a positive credit history.
Some of the ways to use the FD credit card effectively are:
Paying Bills On Time
The payment history of a credit card holder is the most crucial factor in determining their credit score. Making timely and full payments every month showcases the cardholder’s dependability and trustworthiness. This practice also helps them avoid late payment fees, penalties, and interest charges. Paying bills on time can increase their credit score by up to 35%. Conversely, defaulting on payments can severely impact their credit score, as it indicates that they cannot repay their debts and pose a high risk of defaulting again. In the worst-case scenario, the bank may take legal action, resulting in the seizure or liquidation of their fixed deposit account to recover dues. Defaulting on payments can reduce their credit score by up to 35%.
Maintaining a Low Credit Utilisation Ratio
The credit utilisation ratio is an important aspect of managing credit cards . It is the percentage of available credit that a cardholder uses, and it is recommended to maintain a low credit utilisation ratio to improve one’s credit score. For instance, a credit limit of Rs. 50,000 with the usage of Rs. 10,000 in a month would result in a credit utilisation ratio of 20%. A low credit utilisation ratio indicates that the cardholder is financially responsible and can manage their finances effectively, saving them from incurring interest charges and exceeding their credit limit. Conversely, exceeding the credit limit can adversely affect the cardholder’s credit score, triggering lower credit limits or even the cancellation of their card by the bank. It can also result in over-limit fees and higher interest charges, indicating poor financial management skills and over-leveraging. Therefore, it is essential to maintain a low credit utilisation ratio to improve one’s credit score and demonstrate responsible financial practices.
Active Fixed Deposit Account
A cardholder’s credit score is also affected by the length of their fixed deposit account history. A longer credit history indicates responsible usage and timely payments, which can help diversify the cardholder’s credit mix and demonstrate stability. Regularly using the fixed deposit account and keeping it active can improve the credit score by up to 15%. However, closing the account before paying off the balance or completing the fixed deposit tenure can negatively impact the credit score. This is because it reduces the length of the credit history and credit mix and may result in the loss of interest on the fixed deposit amount and a penalty for early withdrawal. Closing an account before the term’s end could significantly reduce up to 15% credit score.
Conclusion
Fixed deposit credit cards are a convenient and cost-effective option for credit card users who want to enjoy lower interest rates and higher credit limits. They also offer the benefit of earning interest on the fixed deposit amount, which acts as collateral for the card. However, the impact of FD credit card on the cardholder’s credit score depends on how they use the card. If the cardholder pays their bills on time, they can improve their credit score and build a positive credit history. On the other hand, if they default on their payments, they can damage their credit score and lose their fixed deposit amount. Therefore, fixed deposit credit card users should be responsible and disciplined in managing their card usage to avoid any negative consequences on their credit scores.
FAQs
1. Is the impact of FD Credit Card on my credit score only negative?
No, the impact of FD Credit Card on your credit score is not only negative. Like any other credit card or loan, paying back the debt on time will positively impact your credit score, while delaying or missing payments will negatively impact it.
2. What happens to my fixed deposit amount if I cancel my fixed deposit credit card?
If you cancel your credit card, your fixed deposit amount will be released, and you can withdraw it or renew it as per your choice. However, you should pay off any outstanding balance on your credit card before cancelling it.
3. How much is the minimum and maximum fixed deposit amount required for getting a fixed deposit credit card?
The minimum and maximum amount of fixed deposit required for getting a fixed deposit credit card depends on the bank’s policy and the cardholder’s preference. However, on average, the minimum amount ranges from Rs. 10,000 to Rs. 25,000; the maximum amount can go up to Rs. 10 lakhs or more. The higher the fixed deposit amount, the higher the card’s credit limit.
4. What eligibility criteria are required for applying for a fixed deposit credit card?
The eligibility criteria for applying for a fixed deposit credit card may vary from bank to bank, but generally, they include being an Indian citizen or resident; having a valid PAN card and Aadhaar card; having a fixed deposit account with the issuing bank and having a good credit history or no credit history for new credit card holders.