Here is how you can smartly choose a Credit Card that suits your requirement:
These days, Credit cards are one of the most popular and convenient ways of making payments. On one hand they offer great ease & convenience, on the other hand, if not used prudently, can lead you to a debt trap.
In this article, I will discuss on how to choose a right credit card, various terms used in a credit card statement and how to use your credit card wisely.
How to choose the right Credit Card?
Different companies offer different cards. Usually, the cards are divided into four major segments i.e. basic, co-branded, premium and super-premium cards. With multiple varieties of cards available, the challenge here is to choose the right one. How will you know that the card you have chosen suits your requirement?
Here are few points listed below you should keep in mind before selecting a credit card:
• Spending pattern
Your spending pattern plays a vital role while opting for a particular card over others. You should be clear about the purpose of having the credit card.
For instance, if you want a card for buying household expenses like grocery, or want to use the card to pay your utility bills, you can opt for the shopping card. If you would like to shop at a particular retailer or brand, you can opt for the co-branded card. Fuel related cards can be handy for those who have frequent usage on petrol or diesel bills. Someone who travels frequently can choose to get a frequent flier card.
• Fees and charges
Credit cards will have charges levied on them either directly or indirectly like annual fee, joining fee, renewal fee, interest rate, late payment fees, over limit fees, cash advance fee, cash payment fee, service tax, etc.
Every company has its policy on the charges mentioned above and the charges vary from one company to another and one card variant to another. Try choosing a card with minimal costs attached to it.
Credit card companies offer a lot of benefits and rewards in the form of reward points or payback points for using the card. You can redeem your reward points for purchases, gift vouchers, bill payments, convert the points to air miles, etc.
All companies have their own policies on rewards. It is one of the factors you may consider before choosing a card.
• Customer Service & Safety
It is of huge importance. Always look for a company that provides greater importance to service. With regards to safety, credit card companies these days have a robust system and strong authentication process using OTP for online transactions to avoid fraud. Companies also offer cards with chip and PIN facility.
• Instant Credit Card
If in case, your credit card application was rejected due to bad credit history, and you are looking to improve your credit score, a lot of banks today offer a credit card against the fixed deposits with the bank. These cards are known as Instant Credit Card and can help you to improve your credit profile. All you have to do is approach your bank and open a fixed deposit to get a card against the deposit. The credit limit for such card ranges between 80 to 85 percent of the deposit amount.
Important Terms used on your Credit Card Statement
1. Credit Limit: It is the maximum credit available on your card to borrow.
2. Cash Limit: It is the maximum amount that you can withdraw from an ATM using your credit card.
3. Annual Percentage Rate (APR): It is the interest rate levied on the outstanding balance on your credit card post the due date and is expressed in percentage per annum. The interest rate varies from card to card, banks to banks and ranges between 1.5% to 4% per month or 22% to 48% per annum.
4. Minimum Amount Due: It is the minimum amount a cardholder should pay on or before the due date to avoid default on payment. It is the smaller percentage of the total outstanding balance.
5. Due Date: It is the date by which you have to pay at least the minimum amount due if you are not able to pay the total outstanding amount.
6. Previous Balance: It is the outstanding balance at the end of your last billing cycle. It excludes payment made towards the balance.
7. Late payment fee: It is the fee levied on your credit card if you don’t make the minimum payment required before the due date. It may have an adverse impact on your credit score.
8. Grace Period: It is duration within which you are allowed to make payment on your credit card without having to pay any interest. It is not applicable to cash advances and revolving balances.
9. Billing Cycle: It is the period between the credit card bill statements. The issuer confirms the billing cycle at the time of issuing the card. Due date remains same for every billing cycle.
10. Over-the-limit Fee: It is levied when you extend the maximum credit available or the credit limit on your card. The over limit charge will be 2.5% of the over limit amount subject to a minimum of Rs. 500 per transaction.
11. Finance Charge: It is the total charge for using your credit card which includes interest costs and other fees.
12. Annual Fee: It is a charge levied by the bank each year for use of the credit card. It is billed directly on your statement.
13. Cash Advance Fee: It is the charge levied by the companies for obtaining cash using your credit card. It is calculated as a percentage of the amount withdrawn or could be a flat charge per transaction.
14. Balance Transfer: Balance transfer takes place when the outstanding balance of one credit card is transferred to another in order to lower the interest rate on the balance. However, there is a fee attached to Balance Transfer.
15. Average Daily Balance: It is a method used to calculate the payment due on your credit card. It is calculated by adding each day’s balance and dividing it by the total number of days in a billing cycle.
Also read: 7 Smart Ways to Increase Your CIBIL Score
Credit Utilisation Ratio
Credit Utilisation Ratio is the ratio of the total credit availed by you against the total credit limit offered to you.
Credit Utilisation Ratio = (Total Credit Availed or Total Credit Card Balances) / Total Credit Card Limit
For instance, your total credit limit is Rs. 50,000 and you have spend Rs. 30,000 on your card, then the Credit Utilisation Ratio is 60%.
It is one of the important factor that you should be aware off, as it plays a vital role in calculation of your credit score. For Credit Bureaus it is one of the important tool to assess your credit worthiness. If your Credit Utilisation Ratio is constantly high, you may appear as a credit hungry individual to the Credit Bureaus, and they may not consider you as a credit worthy individual. It is advisable to keep your Credit Utilisation Ratio below 30%. The lower it is, the better it is.
In case of multiple credit cards, you have to maintain the Credit Utilisation Ratio for all the cards put together.
How to use your Credit Card wisely?
Once you have got your credit card, it’s important that you keep the below points in mind before you start using your credit card:
• Go through the terms & conditions on your card and understand all the charges before you start using your card.
• Don’t miss your payments; make payments in full and on time i.e. before the due date. Making payments in full and on time may help you improve your CIBIL score.
• Keep a track of your spending so that you stay within the credit limit. Extending your credit limit will not just add a penalty on your credit card, but it may also impact your credit score.
• Avoid using your card for cash advances as the interest starts accruing from the day you make the transaction, and you may end up paying higher interest charges.
• Consider setting up a standing instruction from your bank account for your credit card bill in full.
• Try using your credit card for utility bill payments, paying an insurance premium, etc. thereby blocking some portion of your credit limit, further leading to a less scope for overspending. You can also earn cash back on your bill payments.
• Keep checking your credit card statement. It will keep you informed about the purchases, credit balance available, the amount due, payment due date and many other details of your credit card account.
• Use the trusted websites with proper checks in place for online shopping so that you do not end up getting trapped in a fraud.
• Never provide your credit card details to anyone over the phone, claiming to be from your credit card issuer.
Credit cards come with both pros and cons, so use your card wisely. It’s advisable that whenever you use the card; make the payments in full and on time, well before the due date to avoid any late payment charges and interest charges on the outstanding balance. If your payment remains due for more than three days after the payment due date, then your credit card company will report your credit card account as “Past Due” to “Credit Information Companies” which may negatively impact your credit score.