It’s funny how a tiny ‘plastic’ card allows us financial freedom. At the same time, it does put a sense of responsibility on our novice shoulders to manage and handle the new credit card smartly. The chances of over spending and exceeding the allotted credit limit are high in case of new credit card users.
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 balance credit amount within the due date, you accrue interest on your average daily balance.
How it works?
An RFID chip along with your name, credit card number and card validity is imprinted on the front.
When you make use of your credit card to make payments to a cashier via POS or make payments via an online merchant, 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 made by you using the credit card are accumulated by the card issuing authority or bank and sent to you in the form of a bill.
Charges associated with credit cards
There are many credit card charges that you as a new user need to know about. Some of them are:
- Annual fees: 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, a fee of a minimum of Rs.200 or higher could be applicable annually.
- Late payment charges: are 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: range between 1.99% and 4.00%. Converting this into Annualized Percentage Rate (APR) works out to 24-48%.
- Charges for Exceeding the Credit limit: based on the over spent amount.
- Service tax: is charged at approximately 14%, applicable on interest and other charges.
- Cash withdrawal charges: from an ATM operated by your credit card issuing bank for a fixed amount depending upon the amount withdrawn.
- Duplicate statement fee: is charged by some card companies. Avoid this by checking your credit card statements online.
- Outstation cheque fee: is a minimum amount charged for using your credit card outside of the credit card usage area.
Now that you have a brief idea of what Credit cards are and why we need to be prompt with its bill payment, let us look at 5 pointers to keep in mind with your brand new credit card.
- Credit Limit
When you will receive your new credit card from a bank or credit card issuing authority, the credit 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.
- Payment in full
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.
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.
- Be strict with budget
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.
- Security of your card
Never disclose your Credit card advance PIN number and your CVV (Card Verification Value) number to anyone. That’s a sure fire way to card misuse and a cleaned out bank account.
Also, ensure your online shopping is on a secure website.
- Credit Score
Banks and digital lending platforms access your credit records to assess creditworthiness for loans. 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.
Getting a new credit card itself is an achievement and shows you are financially capable of making the bill payments. The only thing you need to keep in mind now is to not let the credit card jeopardize your financial goals.