Applying for your first credit card is a huge milestone in your financial journey and can often prove to be a daunting task. Understandably, since there are over a hundred different cards available in the market and very little guidance on how to go about it.
We believe credit cards are powerful financial tools, if used rationally, that can benefit you in multiple different ways and help build a strong credit history as well. If this is your first time applying for a credit card, let us be your voice of reason and take you through some of the things that you must know before applying for one.
- Different types of credit cards
There is a whole list of credit cards that one needs to be aware of before purchase. From beginner level credit cards to travel credit cards, here are some of the credit cards available in India: Basic Credit Cards (given to entry level customers) Secure Credit Cards (for those who have a poor credit history)No Annual Fee Credit Cards (does not levy an annual fee for the usage of the credit card) Low-Interest Credit Cards (those that offer a lower interest rate as compared to the other cards from a similar category) Balance Transfer Credit Cards (low-interest rate for a specified period of time) Rewards Credit Cards (offers some kind of rewards for every rupee you spend with the card) Cashback Credit Cards ( offer a certain percentage of the purchase amount) Travel Credit Cards (offers benefits such as travel insurance, global acceptance, favourable currency conversion rates) Entertainment Credit Cards (provide discounts and offers on entertainment-related spends)Premium Credit Cards (for high income individuals) and much more.
- Rate of Interest
Interest rate is of the main reasons that banks issue credit cards. The interest rate on a credit card is usually higher than that on loans. Credit cards follow the daily compounding interest rate which is based on the Annual Percentage Rate (APR). Based on the type of card you choose you’ll find yourself paying either a fixed or a variable interest rate.
- Interest-free period
An interest-free period is a duration from the date of the transaction to the payment due date, something that is offered by most credit cards. If the full payment is made within this period then there is nothing extra that you have to pay to the bank. However, payment post this interest-free period comes with an applicable interest fee which is usually on the higher side. It’s advisable to make the entire payment within this period to avoid any extra fees.
- Fees and charges
This is probably considered one of the most important elements of a credit card agreement. Fees and charges help you determine how much you will be paying for the card, withdrawing cash from the ATM, or upon failing to make the payments. Some of the important fees to know about : annual fee, late payment fee, over-the-limit fee, cash advance fee, balance transfer fee and foreign transaction fee. These fees again differ based on the card issuer so it is important to have a clear understanding of these before proceeding with the application.
- Minimum payment
As part of the credit card agreement with your bank and the transactions against your card, you will be required to either make the full payment or the minimum payment that has been agreed upon. The minimum payment is calculated against the interest amount with one percent principle or on a certain percentage of your current balance. This calculation differs based on the card issuer and hence it is important to understand how your card issuer is going to calculate it.
- Credit limit
The maximum amount that you are eligible to borrow is known as the credit limit. This credit limit is set by your issuer based on your qualifications and eligibility criteria. Be mindful about not reaching or getting close to the credit limit since it will then affect your credit utilization ratio which in turn can damage your credit score. Credit card issuers generally review your account on a quarterly, half-yearly or annual basis and either increase or decrease your credit limit.
A credit card generally brings with it certain rewards like points, cashback offers and other discounts and deals. Most of these perks come as an introductory offer to attract buyers but over time you will end up accumulating points that you can redeem in various forms. Check for the offers that different cards have to offer and analyze which ones are going to be beneficial for you.
The important things to know do not end with this list but this is the bare minimum that you must know. While selecting a card, you might feel overwhelmed with the different options available but let your spending habits and your real need for a credit card guide you towards choosing the right one for you. Always remember, everyone’s financial journey is different and what works for someone else might not work for you.