Does this happen to you? You go out for shopping with friends, expecting to spend nothing more than Rs. 2,000; but end up spending close to Rs. 10,000! Thanks to the magic of the plastic card, called Credit Card, you don’t have to think twice before purchasing the product of your choice. A credit card gives you the financial freedom to stretch your spending; but on the other hand, there is caution you need to keep. Credit Cards come with a bagful of responsibilities which you need to understand – both, pre-application and post approval of a new credit card. We assume that you already own one; hence, the focus of this piece is on ways how you can use your credit card smartly.
We care for you. You may be an existing borrower or someday apply for a personal loan from Loan Singh. In either case, you need to be diligent in your credit card obligations to enjoy a positive repayment history. Handling your credit card well could be the most important factor in getting new credit approved. Let’s begin by first knowing what credit cards are, and how they work.
A credit card is a rectangular piece of plastic – with a magnetic strip on the back and your basic identification on the front. It is a card issued by a bank, or a credit card company, to registered account holders. The card can be ‘swiped’ to pay for expenses at a terminal that accepts credit cards as payments. A credit card is an unsecured type of credit. This means that you do not provide collateral when applying for a new credit card. Your credit bureau score and monthly income, determine if you are worthy enough to get a new credit card, or not.
The credit card issuer creates a revolving account, and grants you a line of credit. When swiped, the magnetic strip on the credit card identifies your financial credit account, and processes the payment. You are assigned a credit card limit, which is a threshold set by the card company, for you to spend on credit. You can later pay back the amount spent, during a fixed tenure, along with interest and charges. The credit card also contains an RFID chip that protects your card against identity theft. Your name, card number and card validity is printed on the card front.
How It Works?
When you use your credit card to make payments, the merchant validates your credit card account and asks the bank if the payment can be processed further. If all goes well, your purchase is added to your credit account. Merchants pay fees to credit card companies – to accept credit cards at their terminals; and credit issuing companies (or banks) receive the merchant fees as revenue. All these expenses and purchases are recorded by the card issuing authority, and sent to you in the form of a bill.
A billing cycle is a period set, within which all purchases and payments are accounted for and billed. It is usually set for 30 days. A grace period of 15-25 days is added to the total number of days of the billing cycle. If the previous month’s balance payment is made before the end of the grace period, no charges are incurred by the cardholder. A minimum balance has to be paid to the credit card company, in case the card holder fails to pay the total outstanding amount by the due-date. This amount is usually 5% of the total balance.
Credit Card Charges
Various charges are levied for different credit card scenarios. Some of them are
Annual Fee: Some banks or credit card companies may offer you ‘No Annual Fee’ or ‘No Joining Fee’ for availing a new credit card. But after the first year, usually, an annual fee of a minimum of Rs.200 or higher could be applicable.
Late Payment Fee: 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 credit amount and company guidelines.
Interest Rate: This ranges between 1.99-4.00%. Converting this into Annualized Percentage Rate (APR), this rate works out to 24-48%.
Charges for Exceeding the Credit limit: This is based on the over spent amount.
Goods and Services Tax: This is charged at approximately 18% of the credit amount; w.e.f. 1st July 2017.
Cash withdrawal Charge: This charge is incurred if you withdraw cash from your credit card, and depends upon the amount withdrawn.
Duplicate Statement Charge: It is charged by some card companies. Avoid this by checking your credit card statements online.
Outstation Cheque Fee: It is an amount charged for using your credit card outside of the credit card usage area.
Use Your Credit Card Smartly
We will be blunt with you. You have to be smart for the sake of your Credit Bureau Report. The history mentioned in your report, should not contain bad credit bureau remarks such as ‘Written-off’, ‘Defaulter’, etc. Be smart in using your credit card, and prevent your credit score from going negative.
Let’s look at some ways by which you can be wise in using your credit card.
Avoid Credit Card Debt
This is a no brainer. Making use of your card judiciously, helps you to keep your credit bureau score positive. You can fall into debt if you pay only the minimum balance and carry the balance forward. Failure to make bill payments on time can lead to credit card debt.
Be careful of your credit card limit
The credit card limit is the maximum outstanding balance you can hold on your credit card without incurring any penalty. In case you overshoot the credit limit, you will have to pay a penalty. Even worse, your credit bureau score will get affected.
Maintain low credit utilization
Low credit utilization means spending no more than 40% of your credit limit. If you do not know what your credit limit is, have a look at your credit card bill statement. Try to get the highest credit limit possible. Of course this will depend on your monthly income and stability, but even if you do not make full use of your high credit limit, it will add value to your bureau score.
Opening multiple cards
One way to make use of your credit card smartly is to not open a new credit card within at least 6 months from the last one. This will again depend on how prompt you are with your current card. Your current financials also determine if you can get approval for a new credit card, or not.
Closing multiple cards
In case you already own more than 2 credit cards, never rush to close them. Close them at regular intervals. Abrupt closure of a credit card means your credit report is devoid of history. With no history, your chances of availing unsecured credit will reduce. Also, close the credit card which is the newest.
Bargain for a lower interest rate
In case, if you have been prompt for a long time with your card obligations, and have built a good repayment track record, you can speak to the card issuer to reduce your interest rate. It is not certain that the rate would be reduced, but you can try anyway.