In today’s financial landscape, individuals are offered a wide range of financial products to help them manage their Credit Card. Among these, a credit card and a fixed deposit (FD) are two popular options. While they serve very different purposes, both offer financial advantages. However, more and more individuals are opting for credit cards as a convenient and flexible alternative to the more traditional fixed deposit route.
In this article, we will explore the benefits of getting a credit card against fixed deposit and why it could be a smarter choice for your financial needs.
Understanding Fixed Deposits (FD)
Before diving into the benefits of using a credit card instead of a fixed deposit, let’s first understand what an FD is. A Fixed Deposit is a savings account where an individual deposits a lump sum amount with a bank or financial institution for a predetermined period at a fixed interest rate. The benefits of FDs include:
- Security: Since the money is locked in for a specified period, FDs are often seen as one of the safest investment options.
- Guaranteed Returns: The interest rate is fixed, providing predictable returns.
- Low Risk: With no market fluctuations involved, FDs are considered a low-risk investment.
However, there are some key limitations of FDs:
- Liquidity Issues: Once the money is locked in an FD, you cannot access it until the maturity period ends, unless you choose to break the FD prematurely (which may lead to penalties).
- Low Returns: Although FDs provide guaranteed returns, the interest rates are generally lower than other forms of investments, such as stocks or mutual funds.
- No Flexibility: FDs do not offer much flexibility when it comes to withdrawing or transferring funds.
What Is a Credit Card?
A credit card is a payment card that allows users to borrow funds from the bank or financial institution up to a certain limit, which they can then use to make purchases or pay for services. The cardholder is required to pay back the borrowed amount within a specified period, typically on a monthly basis, with the option to carry forward a balance with interest if needed.
Credit cards come with various features and benefits:
- Revolving Credit: Unlike FDs, credit cards offer flexibility, allowing you to borrow and repay as per your needs.
- Rewards and Incentives: Credit cardholders often earn rewards points, cashback, or discounts on purchases.
- Convenience: Credit cards are widely accepted for both online and offline purchases.
While both FDs and credit cards can be beneficial, they serve different purposes. Let’s now explore why getting a credit card might offer more advantages compared to maintaining a fixed deposit.
1. Credit Cards Provide Flexibility and Liquidity
One of the key benefits of using a credit card over an FD is flexibility. Fixed deposits require the investor to lock in their money for a predetermined period, which means that if you need access to the funds before the maturity date, you may incur penalties or lose some of the earned interest. This makes FDs less liquid and less flexible compared to credit cards.
On the other hand, credit cards offer immediate liquidity since they allow you to borrow money whenever you need it, up to your credit limit. Whether you’re facing an emergency expense, planning a big purchase, or just need temporary funds, your credit card is readily available for use. In contrast, with an FD, you are tied to a fixed term and often have to break the deposit to access your funds.
2. Access to Interest-Free Periods
Another significant advantage of a credit card over an FD is the interest-free period. Most credit cards come with a grace period (usually between 20 to 50 days) during which you can repay your balance in full without incurring any interest charges. This feature makes credit cards particularly useful for people who are able to pay off their outstanding balance on time but need some time to manage their cash flow.
In contrast, when you invest in an FD, the interest earned is taxable, and if the FD is broken before maturity, you may lose some of the interest. While FDs offer security, they do not provide any leeway or grace period like credit cards.
3. Building Credit Score
Using a credit card responsibly can be a great way to build or improve your credit score. Your credit score plays an essential role in determining your eligibility for loans, mortgages, or other financial products. By consistently paying off your credit card bills on time, you establish a good credit history, which can lead to better credit limits, lower interest rates, and access to larger loans in the future.
Fixed deposits, on the other hand, do not help in building a credit score. FDs are not linked to your credit history, and therefore, using an FD as a financial tool will not contribute to improving your credit score.
4. Rewards, Cashback, and Discounts
Credit cards often come with reward programs, cashback, and discounts for making purchases, especially for specific categories such as travel, groceries, or dining. Some credit cards offer sign-up bonuses, loyalty points, or travel miles, which can be redeemed for various products, services, or even flight tickets.
In contrast, fixed deposits do not offer any rewards apart from the interest paid on your investment. The lack of rewards or perks makes FDs less attractive compared to credit cards, which not only help you with your purchasing power but also offer you additional benefits for your everyday spending.
5. Emergency Funds Access
While you may have an FD as a backup for emergencies, access to the funds isn’t always immediate. In case of an emergency, breaking an FD prematurely may lead to a penalty and a reduction in your interest earnings. With a credit card, you have immediate access to emergency funds without any penalties. This makes a credit card a more flexible option for urgent situations.
Moreover, many credit card issuers also provide emergency assistance services, such as cash advances or help with lost cards, making them a more reliable option when it comes to financial emergencies.
6. Global Acceptance and Convenience
Credit cards are accepted globally, both online and offline, making them a convenient option for travel, shopping, and daily expenses. Many credit cards offer foreign exchange benefits, no international transaction fees, and other perks, making them ideal for international use.
FDs, however, are not useful when it comes to global transactions or day-to-day purchases. Their main advantage lies in the fixed interest returns, but they are not as versatile or convenient as credit cards.
7. Potential to Earn Money through Cashback
In certain cases, you can earn cashback for making purchases on specific categories like groceries, fuel, and dining. Depending on the credit card you have, cashback rewards can accumulate and be redeemed either as statement credit, deposits to your bank account, or even as gift cards. This feature makes credit cards a potential source of income while spending.
FDs, in contrast, don’t offer the opportunity to earn money from your spending. The interest rates on FDs are fixed and do not change based on your personal usage or needs.
Conclusion
While both credit cards and fixed deposits have their own advantages, using a credit card offers far greater flexibility, rewards, and potential to build a strong credit score. Credit cards provide immediate liquidity, interest-free periods, and access to global payment systems, making them a more versatile tool for managing your financial needs. On the other hand, fixed deposits are a low-risk investment tool best suited for individuals looking to lock in their savings for a predetermined period.
Ultimately, the decision between using a credit card or opting for an FD depends on your financial goals. If you need liquidity, rewards, and the ability to build your credit, a credit card may be the better option. However, if you are looking for a risk-free, interest-earning investment tool, an FD may be more suitable.
It’s essential to assess your financial situation and needs before choosing between these two options. Whether you’re building your credit, managing daily expenses, or saving for the future, a well-thought-out decision will ensure that you make the most of the financial tools available to you.
