In the Indian financial landscape, individuals have access to a diverse range of credit products designed to meet varying needs and circumstances. Among these, the 'credit card against fixed deposit' stands out as a unique offering, particularly appealing to those who might not qualify for a traditional, unsecured credit card. To understand this product better, it's essential to first grasp the fundamentals of a fixed deposit and then delve into the specifics of a credit card secured against it.

Understanding Fixed Deposits in India

A fixed deposit (FD) is a popular investment instrument in India offered by banks and non-banking financial companies (NBFCs). It allows individuals to deposit a lump sum of money for a pre-determined period, ranging from a few days to several years, at a fixed rate of interest. Some key features of fixed deposits in India include:

• Assured Returns: FDs offer guaranteed returns, as the interest rate is decided at the time of deposit and remains constant throughout the tenure. This makes them a relatively low-risk investment option, especially attractive to risk-averse individuals.
• Flexible Tenures: Investors can choose the duration of their deposit according to their financial goals and liquidity preferences. Tenures can range from as short as 7 days to as long as 10 years or even more in some cases.
• Varying Interest Rates: Interest rates on FDs can differ based on the bank or NBFC, the deposit amount, and the tenure. Generally, longer tenures may attract slightly higher interest rates. Senior citizens often receive preferential interest rates, which are typically 0.25% to 0.50% higher than the rates offered to the general public.
• Payout Options: Investors usually have the option to choose how they receive the interest earned. Options may include monthly, quarterly, half-yearly, annually, or cumulative interest, where the interest is reinvested and paid along with the principal at maturity.
• Premature Withdrawal Facility: While FDs are meant to be held until maturity, most banks offer a facility for premature withdrawal in case of urgent financial needs. However, this may come with a penalty in the form of a reduced interest rate. Some specific tax-saving FDs may have a lock-in period of five years with no premature withdrawal allowed.
• Loan Against FD: A significant feature of FDs is the option to avail a loan against them. Banks typically allow borrowing up to a certain percentage (e.g., 75% to 90%) of the FD value. The interest rate on such loans is usually a few percentage points higher than the interest rate earned on the FD. This provides liquidity without having to break the deposit and lose out on the earned interest.
• Taxation: The interest earned on fixed deposits is generally taxable as per the individual's income tax slab. However, investments in tax-saver FDs (with a 5-year lock-in) qualify for tax deductions under Section 80C of the Income Tax Act, up to a specified limit (currently ₹1.5 lakh per financial year). The principal amount invested in a regular FD is not eligible for tax deduction. Additionally, banks are required to deduct tax at source (TDS) if the total interest earned across all FDs with a single bank exceeds a certain threshold in a financial year.

Credit Card Against Fixed Deposit: The Specifics

A credit card against a fixed deposit, also known as a secured credit card, is a type of credit card where the credit limit is secured by a fixed deposit held with the same bank or financial institution. This product caters to individuals who may not meet the eligibility criteria for a regular, unsecured credit card due to factors such as a limited or no credit history, a low credit score, or insufficient income proof. Here are the key aspects of a credit card against FD:

• Collateral Requirement: The primary requirement for obtaining this type of credit card is having or creating a fixed deposit with the issuing bank. The fixed deposit acts as collateral or security for the credit line. The bank places a lien on the FD, which means the cardholder cannot prematurely withdraw the deposit without the bank's consent, usually until the credit card outstanding dues are fully paid.
• Credit Limit: The credit limit offered on a credit card against FD is directly linked to the amount held in the fixed deposit. Typically, banks offer a credit limit that is a certain percentage of the FD value, often ranging from 75% to 90%. For instance, if an individual has an FD of ₹50,000, they might be eligible for a credit card with a limit of ₹37,500 to ₹45,000. Some banks might allow linking multiple FDs to increase the credit limit.
• Eligibility Criteria: The eligibility criteria for a credit card against FD are generally less stringent compared to regular credit cards. The main requirement is usually having a fixed deposit of a specified minimum amount (which can vary between banks, for example, from ₹5,000 to ₹25,000 or more) and meeting basic KYC (Know Your Customer) norms, such as being an Indian resident and of a certain minimum age (usually 18 years). Income proof or a high credit score are typically not mandatory.
• Interest on Fixed Deposit: A significant advantage of this product is that the fixed deposit continues to earn interest at the agreed-upon rate even while it is acting as security for the credit card. This allows the cardholder to enjoy the benefits of a credit card without losing the returns on their investment.
• Usage and Features: In terms of usage, a credit card against FD functions similarly to a regular credit card. Cardholders can use it for various transactions, both online and offline, up to the assigned credit limit. They receive monthly statements and are expected to make payments by the due date to avoid interest charges. These cards may also come with some additional features like reward points, cashback offers, and sometimes even travel benefits, although these might be less extensive than those offered on premium unsecured cards.
• Interest-Free Period: Like most credit cards, a credit card against FD usually offers an interest-free period (grace period) on purchases, typically ranging from 45 to 55 days. If the outstanding balance is paid in full by the due date, no interest is charged. However, if the payment is not made in full, interest will be levied on the outstanding amount as per the bank's terms and conditions. The interest rates on these cards might be comparable to or sometimes slightly lower than those on regular entry-level credit cards.
• Fees and Charges: Credit cards against FD may have various fees and charges associated with them, such as joining fees, annual fees, late payment fees, over-limit fees, and cash advance fees. Some banks might offer these cards with no or low annual fees, especially if the FD amount is substantial. It's crucial for applicants to understand the fee structure before obtaining the card.
• Building Credit History: For individuals with no prior credit history or a low credit score, a credit card against FD can be an excellent tool to start building or improving their creditworthiness. Responsible usage and timely repayment of dues demonstrate credit behaviour to credit bureaus, which can help in obtaining other credit products in the future.
• Default Scenario: If the cardholder fails to repay the outstanding credit card dues, the bank has the right to recover the owed amount from the fixed deposit against which the card was issued. This is the security that the bank holds, mitigating their risk. In such a scenario, the FD might be liquidated, and any remaining amount after settling the dues would be returned to the cardholder.

In conclusion, a credit card against a fixed deposit offers a pathway to accessing credit for individuals who might otherwise be excluded from the traditional credit card market. By leveraging their savings in the form of a fixed deposit, they can obtain a credit line while continuing to earn interest on their deposit.

This product is particularly beneficial for those new to credit, those with a tarnished credit history looking to rebuild it, or those who prefer a secured form of credit. Platforms offer detailed insights into such financial products, helping users make better choices. Understanding the features, benefits, and obligations associated with both fixed deposits and credit cards is essential for making an informed decision about whether this product aligns with one's financial needs and goals in the Indian context.