FD-Backed Credit Cards: Weighing Benefits and Risks in the Market
FD-Backed Credit Cards: A Practical Starting Point for Building Credit
Overview
FD-backed credit cards are designed for individuals with low or no credit history, offering a straightforward approval process. By placing a lien on a Fixed Deposit (FD), banks provide a credit card with a limit typically set at 75-90 percent of the FD amount. This type of credit card is ideal for students, first-time earners, freelancers, and gig workers without stable income.
How FD-Backed Credit Cards Work
FD-backed credit cards are issued against a Fixed Deposit (FD), which serves as collateral for the bank. The borrower opens a Fixed Deposit, typically starting from Rs 5,000, and the bank places a lien on it. In return, the borrower receives a credit card with a limit set at 75-90 percent of the FD amount, while the deposit continues to earn interest.
Key Benefits and Features
- Easy approval: Approval is straightforward and often does not require income proof.
- FD earnings: The borrower's fixed deposit continues to earn interest while securing the credit card.
- Builds credit history: FD-backed credit cards can help individuals with low or no credit history build a positive credit history.
- Discipline: The spending limit is linked to the borrower's own FD, naturally keeping borrowing in check.
Key FD-Backed Credit Cards in India
Read also: Missing a Single EMI Payment Can Adversely Impact Credit Profile
Several banks offer FD-backed credit cards with varying entry requirements and features, including:
- IDFC FIRST EA₹N: Entry-level option with FDs as low as Rs 5,000.
- Kotak 811 DreamDifferent: Mid-range card with better rewards and everyday usability.
- IDFC FIRST WOW!: Premium variant with higher reward rates or zero forex markup.
Practical Tips and Common Mistakes to Avoid
To use an FD-backed credit card effectively:
- Treat it as a credit-building tool: Use the card to build credit and avoid casual usage.
- Monitor spending habits: Keep borrowing in check by being mindful of the spending limit linked to the FD.
- Choose the right card: Select a card that aligns with your financial goals and usage habits.
Investor Takeaway
Consider the potential benefits and drawbacks of FD-backed credit cards before applying.
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