When it comes to choosing the right credit card, it can be confusing to decide between a regular credit card and a credit card against fixed deposits. Both serve the same purpose of allowing you to borrow money for short-term needs, but they operate differently. Understanding the distinctions can help you choose the best option for your financial situation.
What is a Regular Credit Card?
A regular credit card is a widely known financial tool. It allows you to borrow money from a bank or financial institution, up to a pre-approved credit limit. The amount borrowed must be repaid either in full or in monthly instalments, with the option to carry forward the balance by paying interest.
Typically, the credit limit on a regular credit card is determined by your credit score, income, and repayment history. If you have a strong credit history, you can expect a higher limit and possibly better benefits like rewards or cashback.
What is a Credit Card Against Fixed Deposits?
On the other hand, a credit card against fixed deposits is a secured credit card that requires you to place a fixed deposit as collateral with the bank. The credit limit on this type of card is usually a percentage of the fixed deposit amount, typically around 80% to 90%.
Since the credit card is backed by a fixed deposit, it is available to individuals who may not qualify for a regular credit card due to a low credit score or a lack of credit history. It acts as a more accessible option while also allowing you to earn interest on your fixed deposit.
Now, let's break down the key differences between these two types of cards.
1. Eligibility Criteria
For a regular credit card, eligibility depends largely on your credit score, income, and repayment ability. The better your credit score, the higher your chances of approval and securing a better credit limit.
A credit card against fixed deposits, however, is easier to obtain because it is secured by your fixed deposit. Even if you have a low or non-existent credit score, you can still qualify for this card, as the bank has the security of your fixed deposit. This makes it an ideal option if you're just starting to build credit or if your credit score has taken a hit in the past.
2. Credit Limit
The credit limit on a regular credit card is determined by various factors like your credit score, income, and repayment history. It can vary significantly based on the lender's assessment of your creditworthiness.
With a credit card against fixed deposits, the credit limit is generally based on the amount of your fixed deposit. The limit typically ranges from 80% to 90% of your deposit amount. This means that the higher your fixed deposit, the more credit you can access.
3. Interest Rates
Interest rates on a regular credit card can be quite high if you carry forward your balance or miss payments. The interest charged on outstanding amounts is one of the highest among financial products, which can quickly lead to debt accumulation if not managed properly.
In contrast, a credit card against fixed deposits usually offers lower interest rates. Since the card is backed by collateral, lenders are more likely to offer competitive interest rates, making it a more affordable option if you're looking for a lower-cost credit card.
4. Security Deposit
One of the most significant differences is the requirement for a security deposit. A regular credit card does not require any deposit, as it is an unsecured form of credit. The bank or financial institution trusts your ability to repay based on your creditworthiness.
In the case of a credit card against fixed deposits, you must place a fixed deposit as collateral. This deposit acts as a security for the lender and helps you earn interest. The amount of the fixed deposit usually determines your credit limit.
5. Credit Score Impact
With a regular credit card, timely payments and responsible usage positively affect your credit score. However, missed payments or high credit utilization can hurt your credit rating.
A credit card against fixed deposits is an excellent way to build or repair your credit score. Since the card is secured by your fixed deposit, the risk of defaulting is lower for the bank, making it a good stepping stone to build a strong credit history. If you make timely payments and use the card wisely, you can improve your credit score, eventually qualifying for a regular credit card.
6. Rewards and Benefits
Regular credit cards often come with attractive rewards, cashback offers, and other benefits such as travel insurance, airport lounge access, and more. These perks are generally available to those with higher credit limits and better credit scores.
While a credit card against fixed deposits may not offer the same level of rewards or benefits, some still provide basic rewards programs. The focus of these cards is more on accessibility and affordability than offering premium benefits.
7. Risk and Penalty
A regular credit card comes with the risk of accruing high-interest charges if you fail to make timely payments. Defaulting on your payments can also lead to a drop in your credit score, making it harder to secure loans or credit in the future.
For a credit card against fixed deposits, the risk for the lender is lower because your fixed deposit serves as collateral. However, if you default on your payments, the bank has the right to liquidate your fixed deposit to recover the outstanding balance. While this might seem risky for you, it ensures that your debt doesn't spiral out of control, as the lender can easily recoup their funds.
Which One Should You Choose?
If you have a good credit score, a regular credit card offers more flexibility, higher limits, and potentially better rewards. It’s a great option if you’re confident in your ability to manage credit and make timely payments.
However, if you're new to credit or have a low credit score, a credit card against fixed deposits could be the better choice. It offers an easier way to access credit, lower interest rates, and a secure way to build or repair your credit score. Additionally, your fixed deposit continues to earn interest, which adds to the overall value of this option.
Conclusion
Both regular credit cards and credit cards against fixed deposits serve different financial needs. Your choice should depend on your current financial situation, credit score, and long-term goals. If you're looking to build credit or prefer lower interest rates, a credit card against fixed deposits might be the ideal solution. On the other hand, if you have an established credit history and are seeking additional perks, a regular credit card could be the better fit.
