Credit score, which reflects an individual’s creditworthiness, plays a vital role when he/she approaches any financial institutions to avail a credit card from them. Financial institutions check the credit score of an applicant and then decide whether to approve an application or reject it.
Thus, the importance of credit score cannot be stressed enough, and individuals looking to avail a credit card with a poor or non-existing credit history can do so by availing a credit card against FD.
What is a secured credit card?
Financial institutions issue secured credit cards in exchange for a fixed deposit that serves as security or collateral. These credit cards are backed by your asset, which should be deposited to the concerned financial institution before you apply for the card.
In the event of a default, the card-issuing institution can seize your collateral to recover your outstanding debt. If you keep repaying your dues on time, they may offer back your FD after a specific time or when you decide to deactivate the credit cards.
Some pros and cons of secured credit cards include –
- Build or re-build your credit history
Strong credit history is always required to avail credit cards or loans from the market. However, the same is not applicable for a secured credit card; so, you can avail this credit card and use it to improve your credit score.
- Easy approval process
Applications for credit card against FD are approved quickly. Unlike normal credit cards, here your FD acts as collateral here and removes the credit risk for your card issuer. Hence, it doesn’t require a background check or income proof, making the approval process hassle-free.
- Helps to maintain a low credit utilization ratio
When you avail a credit card against FD, its credit limit depends on your deposit amount, which is mostly 75%-85% of your fixed deposit. Thus, having a low credit limit will keep your credit utilization ratio under 30%, which always boosts your credit score.
- Low fee
As secured credit card is endorsed by your own assets, financial institutions levy lees annual fees. Even sometimes they don’t charge any annual fee on these credit cards.
- Acquire interest and increase the credit limit
Even though you pledge your fixed deposit to avail a secured credit card, you always can earn interest on the same. Moreover, as your FD keeps on increasing by earning interest, it will also increase your credit limit.
- Small credit limit
The credit limit of secured credit cards depends on the amount of your FD. Hence, if the amount of your collateral is low, the credit limit will also be lower.
- Lock-in of the deposit
Unless you deactivate these credit cards, your FD will be locked with the card issuer company.
- Fewer benefits
Secured credit cards don’t offer huge benefits like substantial cash-back, high bonus and reward points.
After improving your credit score with such cards, you can apply for cards with more benefits. The Bajaj Finserv RBL Bank SuperCard is one such card that offers several industry-first features like welcome bonus, milestone bonuses, cash withdrawal from ATMs without any interest, etc.
To sum it up, a credit card against FD is a useful financial tool to build or improve your credit score, thereby increasing your credit score. With a good credit score, you will be able to avail credit at lower interest rates.