How to Utiilise Recurring Deposits to Build a Strong Credit Profile

December 03, 2024

how-recurring-deposits-can-help-in-building-a-strong-credit-profile

Dreaming of financial stability and a strong credit profile? The key lies in smartly investing in investment instruments like Recurring Deposits. RDs offer a low-risk investment avenue that not only provides assured returns but also plays a vital role in building a strong credit profile. 

 

In this article, we will explore how recurring deposits can contribute to building a robust credit profile. So, let's dive in! 

 

What are Recurring Deposits? 

Recurring deposits are a type of deposit that lets you make monthly investments similar to SIP (Systematic Investment Plan). The interest is generally calculated on a quarterly basis via the compounding method. The interest is paid out at the time of maturity. The tenure ranges from 6 months to 10 years. Is premature RD withdrawal allowed? Ujjivan Small Finance Bank allows pre-mature withdrawal of RDs. However, 1% premature withdrawal fee would be levied on the interest rate pertaining to the tenure. That said, no premature withdrawal penalty is imposed if the withdrawal is made after 6 months from the time of deposit.

 

RD interest rates are fixed and vary based on the tenure. They are considered a popular savings tool due to their structured nature and predictable returns. 

 

Strengthening Your Credit Profile with Recurring Deposits 

While recurring deposits themselves don’t directly impact your credit score, they contribute indirectly to building a strong credit profile through several mechanisms:

 

  1. Promoting Financial Discipline 

    One of the primary benefits of recurring deposits is that they instil financial discipline. By committing to regular deposits, you are essentially setting aside a portion of your income consistently. 

     

  2. Improving Your Financial Stability 

    Having a recurring deposit can enhance your overall financial stability. In times of financial uncertainty, having a corpus can help you avoid missed payments on credit accounts or loans, which could otherwise harm your credit score. 

     

    This stability ensures that you can meet your financial obligations on time, thereby positively impacting your credit history. RDs are one of the most popular choices in building an emergency fund.

     

  3. Demonstrating Savings Capability 

    Financial institutions often look at your savings and investment behaviour when evaluating creditworthiness. A history of regularly contributing to an RD account can be seen as a sign of financial responsibility. 

     

    This can bolster your profile when applying for credit or loans, as banks view consistent savings habits favourably.

     

  4. Reducing Financial Stress 

    Knowing you have a recurring deposit account as a financial cushion can reduce stress during emergencies. 

    Reduced financial stress often leads to better overall financial management, which can prevent late payments and potential defaults that could negatively affect your credit score.

     

How Recurring Deposits Impact Credit History 

While recurring deposits themselves are not reported to credit bureaus and thus don’t directly affect your credit score, the benefits they offer can lead to improved credit behaviour. 

 

By fostering financial discipline and stability, recurring deposits help create a more favourable financial profile. As a result, this improved profile can translate into better credit scores over time.

Final Thoughts

Recurring deposits are more than just a safe place to park your savings; they play a significant role in building and maintaining a strong credit profile. By promoting financial discipline, improving stability, and demonstrating savings capability, recurring deposits indirectly contribute to a healthier credit history. While they don’t impact your credit score directly, the financial habits they encourage are crucial for long-term credit health and financial stability.

 

Start small, dream big! Invest in Ujjivan Small Finance Bank’s Recurring Deposit and enjoy higher interest rates! Save for your long- and short-term goals with our RD and live a stress-free financial life. Start investing with just ₹100!

 

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FAQs

1. How does a recurring deposit help in building a strong credit profile?

Regularly investing in a recurring deposit showcases your financial discipline and improves your credit history, which positively impacts your credit profile. RDs are a popular choice among Indian investors, especially when it comes to meeting short-term goals. 

2. Is it possible to prematurely close an RD account?

In case of premature withdrawal of RD, Ujjivan SFB charges 1% premature withdrawal fee if the withdrawal is made before 6 months from the time of deposit. The penalty is levied on the prevailing interest rate pertaining to the tenure 

3. Do recurring deposits offer higher interest rates compared to savings accounts?

Recurring deposits usually offer higher interest rates than savings accounts, making them an attractive investment option. 

4. Are recurring deposits suitable for long-term goals?

While recurring deposits are more commonly used for short-term goals, they can also be utilised for long-term goals depending on the duration of the tenure and the desired maturity amount. 

5. How long can I keep a recurring deposit account active?

Recurring deposits typically have tenures ranging from 6 months to 10 years, depending on the bank's policies. 

6. Can I open a recurring deposit for my child?

Yes, parents or legal guardians can open recurring deposits for their children's future financial needs. 

7. Are recurring deposits taxable?

Yes, the interest earned on recurring deposits is subject to taxation as per the prevailing income tax laws. It is advisable to consult a tax professional for accurate guidance. 

8. Can recurring deposits be used as collateral for loans?

Yes, some banks provide the option to use recurring deposits as collateral for loans. This allows borrowers to avail funds without breaking their RD and impacting their credit profile. 

9. Is there a limit on the maximum investment amount for a recurring deposit?

Banks usually have a maximum investment limit for recurring deposits, which may vary based on their policies. 

10. Can I convert my recurring deposit into a fixed deposit?

Yes, many banks offer the option to convert your recurring deposit into a fixed deposit upon maturity. 

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