6 points to be kept in mind while opting for a credit card
Credit cards, as we all know, is plastic money which allows us to buy goods and services without having to pay for them immediately at the time of purchase. This very trait makes them desirable to many individuals who wish to own multiple credit cards and swipe them rampantly. While owning a credit card is not a bad thing, it is imperative to use it prudently; or else, it may not be too long before you fall into the credit card debt trap and ruin your financial health.
For your benefit, PersonalFN has listed down 6 points to keep in mind while opting for a credit card:
Remember that taking the right credit card is just the first step. How you use this plastic money will determine your financial well-being. Credit cards must be used very cautiously. You must not only be careful while making purchases on credit, but also ensure that you always repay the outstanding dues in full every time your bill becomes due. Partial repayments can lead you into a credit card debt trap and also have a bearing on your credit score.
- Credit limit
First before you use your card, it is vital to know the credit limit on your card. You see, this limit is the maximum amount that you are allowed to spend on your credit card. If you are a first time card user or an avid spender, it is better that you opt for a card with a low limit (say Rs 15,000 - Rs 20,000) although the sales personnel from such banks may try to push one with a higher limit and you may indeed deserve one. While you opt for a credit card, use it legitimately even if you may have an option to exceed the credit limit subject to terms and conditions. This is because, some banks may charge a huge penalty for crossing the limit on your credit card.
- Interest rates
Credit cards offer a facility wherein you need not pay the full amount due every month, and only pay the minimum amount. However, you should be aware that many banks offering credit cards charge a very high rate of interest for not paying the outstanding dues in full.
Hence you must check the interest rate applicable on your card, if you are likely to prolong your payments. Also, you must find out if there are any annual or other fees attached to the credit card and compare the amounts between different banks. You should also speak to them and find out if they are willing to waive off such fees or charges.
- Grace period
Grace period is the extra time provided by the bank to pay your outstanding dues without charging any interest. Longer the grace period, more beneficial it is for the credit card holder.
- Rewards and incentives
Some cards offer reward points or incentives on making purchases on the card that can be redeemed or used at a later date. Analyse your spending habits and find out if such cards can be of any advantage to you. If so, choose a card that suits you the best. For instance, some credit cards allow you to redeem reward points at some apparel stores or specific shopping centres. If you prefer purchasing clothes from these places, then choose and use credit cards with these benefits. If you often go for movies, you could consider cards which give you similar benefits and facilitate savings.
- Irrelevant benefits
You see, banks advertise their credit cards really well. Many times they offer various benefits on the credit cards which might sound alluring but may not be useful to you. For instance, many credit cards offer an insurance cover. PersonalFN is of the view that you ignore this benefit and see the core offering - credit card. If the card has features that suit you, then you can opt for it even if there is no insurance cover. On the other hand, if the card features are not to your liking then reject it regardless of the insurance cover. In any case, on most occasions the insurance cover is usually linked with so many terms and conditions that it is very difficult to claim the same. It is altogether another thing that the insurance cover is unlikely to be sufficient for you.
Also, remember that although credit cards can be used for borrowing cash, this can be extremely expensive for you. Banks charge a very high interest rate for cash borrowings on credit cards, without providing any grace period for its repayment.
- Terms and conditions
Apart from all of the above, it is also imperative to read the devil in the fine print, which could have some awry terms & conditions that could take you by the ground. So, do not fall prey to something that is perilous to your interests. If you find anything in the terms and conditions of the card that is not conveyed to you or is contrary to what was conveyed to you, then seek a clarification from the bank or avoid taking or using that card. Remember that once you take the card and begin using it, it will be assumed that you have read the terms and conditions and accepted the same.
PersonalFN is of the view that the controlled usage of a credit card can enable an individual to live life comfortably without harming his / her finances. However, if you are already in debt or find it difficult to be a prudent spender, then it is best to avoid taking a credit card or to stop using it, if you already own one.
PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.
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