A credit card against an FD has made credit accessible to almost anyone, regardless of credit score or income. You pledge your fixed deposit as collateral, get a credit limit against it, and the process is largely paperless and quick.
But what happens to your FD if you stop making payments? It is a fair question, and understanding the answer before you apply is just as important as knowing the benefits.
Understanding how an FD-backed credit card works
Before getting into the details of how defaulting on the credit card affects the pledged FD funds, take a look at how this type of credit card works:
- Your FD serves as collateral
When you apply for a credit card against an FD, your fixed deposit is marked as collateral with the bank. It reduces the risk of lending. Hence, the approval is much easier even with a low credit score and no income proof.
- Credit limit against your deposit
Typically, you get up to a credit limit of 80 to 100% of your deposit value. Some card issuers like IDFC FIRST Bank offer a confirmed 100% of your FD value as a credit limit, regardless of your profile. You can choose from a range of FD credit cards, including FIRST WOW!, FIRST EA₹N or FIRST WOW! Black credit cards.
- Continued interest earnings
Even if it’s pledged, your FD functions as usual. There is no effect on its interest earnings as long as you carry on with your credit card payments smoothly.
What counts as a credit card default
A credit card default typically progresses in stages. Lenders view a pattern of your repayment before taking strict action. Here’s how it can work:
- Missing the minimum due date
If you miss a payment or clear only the minimum due, you incur late fees and interest. This is often met with a warning, and the interest continues accruing until you clear the total due amount. It’s not a default yet.
- Continued non-payments
When your dues remain unpaid for an extended period, you are reported to have defaulted. This action is taken after a while of giving you the opportunity to clear the bill. So, as the last resort, recovery begins.
- Unresolved dues
Even partial or irregular payments are not useful if the total outstanding balance keeps rolling over and remains uncleared for a long period. Hence, unresolved dues are considered as default regardless of your future payments.
Impact of credit card default on your fixed deposit
Once a default is established as a lost cause, the card issuers start the process of liquidating the security, i.e., your FD. Here’s how the recovery impacts your FD:
- Hold on to your FD operations
The bank immediately seizes your FD. This means you can no longer earn interest on it. The funds are seized along with the accumulated interest.
- Adjustment of dues
Your FD deposits plus interest are liquidated in part or based on the amount of recovery, fully. Only what’s due is adjusted and not the entire deposit unless specified in the credit card agreement.
- Premature withdrawal applies
Since the FD is broken before maturity to recover the outstanding due, the applicable penalty or reduced interest comes into effect. The process works similarly to you voluntarily breaking the FD.
Once the outstanding credit card due is recovered, the remaining amount is usually credited back to you. Besides the impact on your FD, your credit score is also affected. A low credit score affects your prospects of getting future credit cards or loans.
Final words
While you can apply for a credit card against an FD with minimal hassle, it also comes with a greater responsibility. Like any other credit card, you are expected to clear outstanding dues on time.
You are also given chances for missed payments until it reaches an extended limit. Banks often reserve the liquidation of FD as the last resort. So, even if you miss one due date, you have the chance to correct the course and save your deposits. Avoid reaching a stage of default to protect your hard-earned savings and credit profile.
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