Credit cards are a popular loan instrument that allow users to carry out merchandise transactions whenever required. There are various credit cards available in the market and before you make your pick, you must keep in mind certain things that would make your card-using experience better. For the first-time credit card users, here are a few things you must understand well.
Charges associated with the card
Credit cards come with a host of charges which include joining fees, annual charges, statement fees, card replacement fees, surcharge, service tax etc., apart from the interest charges on transactions made through the card. If you transact beyond your credit limit, the credit card company would charge you fees for exceeding the limit. However, the credit card companies allow an interest-free period of 40 to 52 days, following which they levy interest at the rate of 1.5% to 3.5% as per the terms of the card. This rate may not seem like a lot, but annualised, it means having to pay 20% to 40% per annum – making credit card debt very, very expensive.
Credit card charges
**The charge could be vary depending on card type and card company
Note- Data taken from websites of multiple credit card companies and reflects just an indicative range. The charges may vary across cards and companies
* Some card companies wave annual charge above certain transaction in a year
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What type of card suits you?
You must pick a card based on your requirement and spending pattern. For example, if you are a travel lover, you should get a card that offers discounts on hotels, travel tickets, etc. If you’re a shopaholic, get a card that offers cash backs and discounts on merchandise. If you are a heavy fuel user, buy a petro-card. If you’re loyal to a brand, buy a co-branded card for discounts and special offers.
Some of the important dates associated with credit cards include the bill date, which is when the bill is generated, and the due date, which marks the date by when the due amount has to be cleared in order to avoid interest payment. The period between two bill dates is called the billing cycle.
Full payment versus part payment of the due amount
After receiving the statement and before the arrival of the due date, you need to pay the minimum amount due (MAD) as mentioned by the card company in the statement. This will keep your credit card active without penalizing for late payment. However, if you choose to pay only the minimum amount, you would lose out on the interest-free credit period on the outstanding amount. Every transaction would be charged with interest from the same day. Therefore, the best practice is to clear the complete outstanding balance before the due date.
Impact on credit score
Credit score data generated by institutions like CIBIL reflects your credit worthiness. The way you use your credit card and make bill payments determine your credit score. If you apply for multiple credit cards, keep hitting the credit limit frequently, and request for a limit enhancement, it shows that you are credit hungry, thus impacting your score negatively. Ideally, keep your use of a credit card at 20-30% of the spending limit, and split your spending between multiple credit cards to reduce this credit use further.
If you miss paying your minimum amount due on a regular basis, your credit score would go down significantly. A negative credit score also tarnishes your borrowing capacity for future.
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How much should you transact with your credit card?
Credit cards need to be used with great discipline. One way of doing it is maintaining a low credit ratio. If your credit card limit is Rs 1 lakh and you exhaust the entire amount, your credit card utilization ratio would touch a level of 100%, which shows that you are credit hungry. In order to lower your credit card utilization ratio, you can split your transactions among many cards. An appropriate utilization ratio is perceived as a well-disciplined use of credit card.
(The author is CEO, BankBazaar)