How to Utiilise Recurring Deposits to Build 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.