A new credit card comes with a credit limit that depends on your credit history and current financials. To maintain a positive credit history you will need to be prompt in your bill payments and not spend over the credit. Go through the terms and conditions of the card to understand the quantum of credit card charges. Be responsible while swiping your card. Remember that purchases using your card are equivalent to taking a loan.
Advantages of Credit Cards
- Convenience – They save you the trouble of carrying hard cash in your wallet and the time as you don’t need to search around for an ATM.
- Tracking – Credit card statements help you track your expenses well. You can use them for financial planning, debt management and budget planning.
- Credit history – You can build a positive credit history by showing banks how prompt and prudent you are while making credit card bill payments.
Alternate Uses of Credit Cards
Besides using credit cards for regular transactions, it is possible to use it as a
Balance transfer credit card– This type of credit card is used to cut the interest on your existing debts. You can use this card to move your balances that you have accumulated on your existing card to another credit card and then enjoy 0% interest for a set period. It is not completely free; the fee is applied once the transfer is done. It is ideal to look at the fee before opting for this card and go for a shorter transfer period. You can use this card also as any other normal credit card but you will mostly be paying an interest on your purchases
Purchase credit card – This card allows you to make purchases for a set tenure with 0% interest charged. This allows you to spend until the tenure is up. You need to also clear the balance before the end of the 0% interest tenure. If the tenure is allotted as 12 months then you don’t have to pay the balance every month but before the tenure is completed. Failure to do so will have you pay interest over it.
Balance transfer & purchase credit card – This combines the benefits of the first two credit cards with the only exception that you receive a shorter 0% interest tenure.
Cash back credit card – This card is useful when you are an on time payer of your credit card bill and never carry forward any credit. This card rewards your good spending habits by providing you a percentage of your spending back but in the form of cash. Differing between bank to bank the percentage could be somewhere between 1-5%. The flipside is that these cards tend to have higher interest rates.
Rewards credit card – Instead of paying you back in cash, this card offers various reward points. The points could be used either for shopping or accumulate air miles to buy flight tickets.
Credit card charges:
Most credit cards levy a series of charges, some obvious, some not so much:
- Joining and annual charges
Credit card companies charge a joining fee when you are issued a credit card. Sometimes credit card companies may exempt you from paying an annual fee for a particular period say 1 year from the time of issue. Some offer a ‘lifetime’ card which bears no annual fees. Approximate charges for joining fees are between Rs.1,000-3,000 depending on the type of credit card. Sometimes on request, the banks or credit card companies may waive off annual fees based on your monthly spends.
- Late penalty or overdue charges
Banks or credit card companies employ collection agents to retrieve outstanding amounts from defaulters. These charges are levied to make up for the expense incurred by the bank or credit card issuer in collecting the outstanding amount. A late payment fee can be either fixed or a certain percentage of the minimum outstanding balance. The fee is usually levied 90 days after your fail to pay the minimum amount towards your card.
- Loss and duplicate statement charges
The monthly statement is delivered free of cost to your email address but print copies to be delivered to your physical address and duplicate statements are charged a fixed sum.
In case your credit card gets lost, you need to pay for a replacement credit card. Even withdrawal from an ATM using your credit card against the credit limit invites a charge. These charges differ from company to company.
- Credit limit charges
This charge is levied if you exceed the credit limit on your credit card. This is usually a certain percentage of the amount that is overdrawn or the amount spent over the credit limit.
- Foreign currency transaction charges
In case you travel abroad and use your credit card towards transactions, the same transaction amount is converted to Indian rupees and a certain percentage of that value is charged by the bank or credit card issuer.
- Cheque bounce charges
If you make the payment towards your credit card bill via cheque and if the cheque bounces, a fixed rate is charged by the bank or issuing company. If the bank or credit card issuer sends an agent to collect the cheque from your physical address, then a fee is charged for that as well.
- Service Tax
The expenses you make via your credit card are subject to service tax. Up to the amount of Rs.2,000, the service tax is waived off.