Trap 21. ‘You’ll Have To Open An FD To Take A Loan Or Credit Card’

If you go to a bank to get a loan or credit card and someone asks you to open an FD to be able to avail of it, it should raise the hackles, especially if you already have a credit history.

Usually, if someone does not have a credit history or has a poor credit score, credit card providers or lenders suggest opening an FD against the liability to convert the credit into a secured loan. In such cases, a lien is placed on the FD amount. Also, banks may charge an interest rate that is around 1-2 per cent above the FD rate. For example, if the FD rate is 7 per cent, the credit may be available at 8-9 per cent.

However, if your credit history exists and credit score is good, lenders or issuers should not have a problem issuing you a credit card/loan based on your credit score. If they still ask you to open an FD, be cautious.

Says Priyadarshini Mulye, a Sebi RIA and certified financial planner, “Getting a loan for an aligned purpose is different from ‘investing in an FD’. As there is a difference between their (FD and loan) purposes, one should clearly ask why they are being asked to open an FD).”

If one has a good credit score and a repayment capacity, then one should take a loan without an FD. One must have a definite purpose behind applying for a loan or credit card. If the loan is backed up by the FD then it comes with low rate of interest as they are secured by the FD.”

So, if you have a strong credit history, view it as a red flag.