Smart Money. Your FD can get you a credit card

Credit cards are generally considered risky bets for banks. But in order to get a better handle on their borrowers, banks are offering credit cards against fixed deposits with a lien marked on it. Banks such as ICICI, SBI, Axis, Kotak and Central Bank offer credit cards against fixed deposits

opened with them. With a deposit to fall back on in case of default, banks are aggressively pitching these products to customers.

So are these good deals for you, the customer? Before getting into its suitability, it is important to know the operational aspects of such a card.

As the name itself suggests, you will need an existing or new fixed deposit with the bank to apply for the credit card. The deposit amount can range from as low as ₹20,000 to a maximum of ₹25 lakh.

Your credit card limit would be 80-85 per cent of your deposit amount. So there is a margin of safety that the bank retains even while offering you a card.

One advantage of such cards for you is that the processing is quick and you need minimum documentation to get your credit card, unlike when you take a regular one. The fixed deposit should generally be for a minimum period of 180 days. A lien would be marked against the fixed deposit.

It would continue to earn interest regularly. But in case there is a default in making credit card payments, the same would be made good from your fixed deposit. Given that you cannot spend more than the specified limit on the card, the bank has its exposure almost fully covered against defaults.

There are certain kinds of customers for whom credit cards against a deposit can prove quite useful.

Most banks specify income levels before granting you a credit card. The income bar can be to the tune of ₹5 lakh per annum. In case you do not meet this income criteria, but still wish to have a credit card, taking one against an FD is a good idea. This may be especially true for those in the first few years of their career.

Then there is the case of debt overload. If you already have a few loans running — home, vehicle, etc — banks may not take a favourable view of your wanting to increase your debt levels. You may also not be eligible for higher credit based on your repayment behaviour. So banks may reject your application for a credit card. Besides this, there may be cases where the credit score of the borrower is not great or has not been correctly updated, which means that your asking for a new card may be frowned upon by institutions.

In such a case, you can opt for a credit card linked to a deposit with any of these banks mentioned earlier.

In case there is a financial emergency (medical, etc) and instead of a regular card, you have a credit card linked to a fixed deposit, you will have twin benefits. First, you will not have to foreclose your deposit and it can continue to earn interest as you can use the credit card. Next, you have a 48-55 days window for making interest-free payments on your card. So you have a sufficient period to shore up liquidity (say with your bonus payment) for repayment of dues. Finally, in case you have such a card and you were to lose your job suddenly, here again the credit period of 48-55 days means that you have that much time to not close your FD and also to find a new job within this period.

Of course, in each of the above cases, time is of critical importance and things should fall in place as stated.

It is also important to note as a customer that you should not be led into reckless spending just because the card dues are covered by a deposit. Ultimately, it would affect your liquidity in the short term and asset allocation process in the long run.

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