The constant hullabaloo, about credit cards, must have gotten to you by now. It is a fantastic financial product that helps you move around without carrying hard cash. This aspect is sure to lure new users to apply for a credit card. But, just like any new product, you need to know all the details about a credit card
- Understand if you really need it, or not?
- Then figure out how you want to use it
- Then learn how to get it
- Details of actually using it
All of Loan Singh’s borrowers are salaried individuals, and we get asked a lot (via our blog) about the different things to consider when applying for a new credit card. We also get asked as to how using a credit card can affect someone’s personal loan repayment history and impending EMIs. The helpful blokes that we are, we thought we could prepare a write-up on the things to consider before availing a credit card and the things to remember while using it (with serious consensus on handling other forms of unsecured credit). So, let’s get into it…
Working of a Credit Card
We cannot progress ahead without first knowing a bit about the premise. You get a credit card, only if you are credit worthy and hold a good repayment history. A credit card is a rectangular piece of plastic that identifies your unsecured credit account.
- It contains a magnetic strip on the back.
- The front of the card houses an RFID chip along with your name, card number and card validity.
- A credit card allows you to spend money taken on credit from the bank or card issuing company.
- The purchases you make via credit card are done within a billing cycle, which is usually 30 days.
- A monthly statement details your transactions for the most recent billing cycle.
- If you have an outstanding balance, you will have to make a minimum payment towards the balance.
- After the 30 days, there is a grace period for payment of the credit amount due. If you pay the credit balance in full, within the due-date, you don’t accrue any interest. But, if you pay less than the entire credit amount, within the due-date, you accrue interest on your average daily balance.
Charges on a Credit Card
There are certain charges you need to know about before applying for a credit card. Though not all, but some of the ones you ought to know of are
- Annual Fee – Some banks or credit card companies may offer you with no annual fee or joining fee, for availing a new credit card. But after the first year, usually, aa annual fee of a minimum of Rs.200 or higher could be applicable.
- Late Payment Charge – This is levied when you fail to pay your credit bill within the due-date. This fee can either be fixed or flexible depending upon the amount and company guidelines.
- Interest Rate – This ranges between 1.99% and 4.00%. Converting this into Annualized Percentage Rate (APR), the total interest works out to 24-48%.
- Charges for Exceeding the Credit limit – It is based on the over spent amount.
- Service Tax – It is charged at approximately 14%, applicable on interest and other charges.
- Cash withdrawal charges – Levied when you make use of an ATM operated by your credit card issuing bank for a fixed amount depending upon the amount withdrawn.
- Duplicate statement fee – It is charged by some card companies. Avoid this by checking your credit card statements online.
- Outstation cheque fee – It is a minimum amount charged for using your credit card outside of the credit card usage area.
Things to keep in mind post availing a Credit Card
After finding out about how a credit card works and what charges are associated with it, let’s look at things that you should remember while using the availed credit card.
When you receive your new credit card from a bank, or credit card issuing authority, the card comes with a certain credit limit depending on your repayment capacity. Over the course of usage, looking at your discipline in prompt bill payment or due to an increase in your income, banks may tempt you to enhance your credit limit. A higher credit limit will allow you to spend more, but it is important to continue to be disciplined and also avoid debt. It is better if you do not increase the credit limit for at least the first year of credit card usage, so that you get used to the payment schedule. Increase the credit limit only when your income increases.
Your credit card bill will mention the amount you need to pay towards transactions done during the billing cycle, due-date of bill payment and the minimum amount payable. Stand-out in a sea of credit card holders by ensuring zero outstanding balance. This helps build trust between you and the credit card company. Also maximize your interest-free grace period. The concept of minimum balance allows you to pay some of the total amount and continue with the credit card usage; but, it also means an added interest charged on the balance that is due. So, make sure you pay the entire bill amount to avoid bearing the interest charge.
Now that you have a new credit card, you might be tempted to get on a shopping spree. Remember that reckless spending could lead to serious damage to your financial planning. Credit card holders end up spending more than they actually can afford simply because of the delayed impact on their bank balance. Make use of a monthly planner or schedule to manage your expenses. Keep track of your credit card statements, as well. This will help you to spot any discrepancies on the bill, such as duplication.
Never disclose your Credit card PIN number and your CVV (Card Verification Value) number to anyone. That’s a sure way to card misuse and a cleaned-out credit account. Also, ensure that whenever you shop online, it’s always on a secure website.
Banks and digital lending platforms access your credit records to assess your creditworthiness. Be smart in using your credit card and prevent your credit score going negative. Be prompt with your bill payments and avoid overspending past the credit limit.
Don’t overlook the incentives you receive with the usage of a credit card. Free air miles and redeemable points on shopping is great, right?