Securing a credit card against a fixed deposit (FD) is an excellent way to build or improve your credit score. This type of card, known as a credit card on FD, is backed by the funds in your fixed deposit, making it less risky for the bank and easier for you to get approved. However, several factors influence the credit limit determination for these cards. Understanding these factors can help you better manage your credit card bill payment and optimise the benefits of your credit card.
The Amount of Your Fixed Deposit
The primary factor influencing the credit card limit on your fixed deposit amount. Generally, banks offer a credit limit of 80% to 90% of the FD amount. The higher the fixed deposit, the higher the potential credit limit.
Most banks require a minimum fixed deposit amount to issue a credit card, though this amount varies by institution. Meeting this minimum threshold is essential to qualifying for the credit card.
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Credit History and Score
While the credit card is secured against an FD, banks still consider your credit history and score when determining the credit limit. A credit score can sometimes result in a higher credit limit, even for secured cards. Conversely, a poor credit history might limit the percentage of the FD amount the bank is willing to extend as credit. Using a credit card on FD responsibly can help improve your credit score. Timely credit card bill payments and maintaining a low credit utilisation ratio positively impact your credit history, which can lead to higher credit limits over time.
Bank Policies and Regulations
Different banks have varying policies regarding issuing credit cards against fixed deposits. Some banks may offer more favourable terms and higher credit limits than others. It’s important to research and compare the policies of different banks to find the best option for your needs. Banks must comply with regulatory requirements when issuing credit cards. These regulations ensure that the bank’s practices are fair and transparent. Compliance with these regulations can affect the maximum credit limit a bank is willing to offer.
Income and Repayment Capacity
Although a credit card on FD is secured by your fixed deposit, some banks may still require proof of income. This helps the bank assess your repayment capacity. A stable income can positively influence the credit limit offered, indicating a lower risk of default. Banks also consider your debt-to-income ratio when determining your credit limit. This ratio is the percentage of your income that goes towards paying debts. A lower debt-to-income ratio suggests better repayment capacity, potentially leading to a higher credit limit.
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Managing Your Credit Card on FD
Making timely credit card bill payments is crucial. Late payments can negatively affect your credit score, leading to penalties and higher interest rates. Setting up automatic payments or reminders can help ensure you never miss a due date. Keeping your credit utilisation low (i.e., the amount of credit used compared to your credit limit) can positively impact your credit score. Aim to use no more than 30% of your available credit limit. This helps improve your credit score and demonstrates responsible credit management to the bank.
Conclusion
A credit card on FD offers a practical way to build or improve your credit score, providing access to credit based on your fixed deposit amount. Understanding the factors that influence credit limit determination, such as the amount of the FD, your credit history, bank policies, and your income, can help you manage your credit effectively.
By making timely credit card bill payments and maintaining a low credit utilisation ratio, you can maximise the benefits of your secured credit card. This responsible financial behaviour can increase credit limits and improve your overall financial health, opening up more opportunities for unsecured credit.
