Evaluating Credit Cards Against FDs and Fixed Income

Credit cards have been promoted as powerful financial tools by fin-influencers and financial geeks. With only 4.4% of the Indian population holding active credit cards, alternative avenues like Buy Now Pay Later (BNPL) and Credit Cards Against Fixed Deposits (FDs) have gained prominence.

In the flourishing digital landscape of India, a fantastic credit tool took its place- Buy Now, Pay Later (BNPL) with the idea of bypassing checkout queues, acquiring the latest and trendiest gadget without having to think about your immediate liquidity needs, and effortlessly managing the expenses. This is the enchantment of BNPL, captivating millions with its convenience and widespread accessibility. Over 80 million Indians have tried to participate in this. However, what haunts this beauty is the beast of carelessness and dreams. Excessive spending may lead to debt pitfalls, emphasising the importance of responsible usage. 

The BNPL market in India is poised to reach $130 billion by 2025, showcasing the evolving financial landscape. In this exploration, we delve into Credit Cards Against FDs, Asset Leasing, and why Fixed Income might be a superior option.

Against this backdrop, Fixed Deposits (FDs) remain a popular investment choice in India, offering guaranteed returns and capital protection. Total outstanding FD investments were over ₹103 trillion as of June 2023, surpassing the combined value of current and savings accounts. While we believe that FDs are trusted only by rural India, the states with the highest average deposits include Delhi (₹8,00,000) and Maharashtra (₹7,30,000).

The Rise of Credit Cards Against FDs:

Credit Cards Against FDs, introduced in 2017, have become a viable option, especially for those without the financial bandwidth to access traditional credit cards. With huge percent of Indian households holding FDs compared to the 4.4% credit card ownership rate, leveraging FDs for credit has become an accessible norm.

How Credit Cards Against FDs Work?

– Collateral Requirement: By pledging a Fixed Deposit as collateral, individuals gain access to a credit card with a limit directly tied to the Fixed Deposit amount.

– Credit Limit: Determined by the Fixed Deposit’s value, these cards offer a credit limit within the bounds set by the financial commitment to the Fixed Deposit.

– Interest Rates and Fees: Generally, interest rates on credit cards against FDs are lower than traditional unsecured ones, making them attractive.

Considering Potential Risks:

What seems to be a good alternative to credit cards and a plastic card for financial freedom has a lot of cons. 

– Impact on Fixed Deposit: Pledging the Fixed Deposit as collateral affects liquidity and potential returns.

– Limitations and Alternatives: Being aware of limitations, such as capped credit limits, and exploring alternative credit options, including asset leasing, is advisable.

To have a credit card with a limit of 1 Lakh, you need to have an FD of 1 lakh as collateral. Though this seems a good alternative, one should only opt for this, given that the benefits exceed the benchmark returns.

Asset Leasing: Generating Returns and Financial Advantages:

Asset leasing involves acquiring and leasing assets to businesses, such as machinery, equipment, or vehicles. Unlike traditional investments, Asset Leasing offers a steady income stream to investors through lease payments, providing them with a fixed-income cash flow model. This strategy especially appeals to those seeking stable returns outside the volatility often associated with traditional markets. Asset leasing can be a compelling alternative investment, and achieving returns in the 20% range is possible under favourable circumstances. Investing in assets related to industries experiencing growth and stability can enhance returns. Specific sectors may offer higher demand for leased assets, translating into better returns for lessors. Depreciation and potential tax credits can positively impact the after-tax return for lessors.

Why Fixed Income Might Prevail:

– Predictable Returns: Fixed-income investments, such as bonds, provide predictable returns, ensuring a steady income stream.

– Lower Risk: Compared to the potential risks associated with credit cards and market volatility, fixed-income options often pose lower risks.

– Preservation of Capital: Fixed-income investments prioritize the preservation of capital, offering stability in uncertain financial climates.

Conclusion:

While credit cards against FDs and asset leasing present unique avenues for credit and capital needs, evaluating the merits of fixed-income options is essential. Fixed-income investments provide predictable returns, lower risks, and a focus on capital preservation. As financial landscapes evolve, a diversified approach that incorporates these options underscores the importance of adaptability in navigating the diverse avenues of credit and investment management.

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FAQs (Frequently Asked Questions):

1. How do Credit Cards Against FDs work, and how does pledging a Fixed Deposit impact its liquidity and potential returns?

   – Credit Cards Against FD’s function by using a Fixed Deposit as collateral, providing a credit limit tied to the FD amount. However, pledging the FD can affect liquidity and potential returns, as it is tied to the credit limit.

2. Why consider Asset Leasing an alternative investment, and what advantages does it offer over traditional investments?

   – Asset Leasing involves acquiring and leasing assets, providing a steady income stream through lease payments. This alternative investment offers stable returns outside the volatility often associated with traditional markets.

3. What are the key advantages of Fixed Income investments, and how do they differ from the risks associated with credit cards and market volatility?

   – Fixed Income investments, such as bonds, provide predictable returns, lower risks, and prioritise capital preservation. This contrasts the potential dangers linked to credit cards and market volatility.

4. Are there limitations to Credit Cards Against FDs, and what alternatives should be explored for credit needs?

   – Credit Cards Against FDs may have limitations, such as capped credit limits. Exploring alternative credit options, including asset leasing, is advisable to make informed financial decisions.

5. How does the evolving financial landscape in India impact the choice between Credit Cards Against FDs, Asset Leasing, and Fixed Income investments?

   – As the financial landscape evolves, evaluating the merits of various options becomes crucial. Understanding the impact of evolving trends on credit and investment management helps make well-informed decisions tailored to individual financial goals.