Are you contemplating applying for a new credit card at a bank? It is definitely a smart thing to do but you should apprise yourself of its pros and cons, and importantly of its key characteristics.
Here, we give a lowdown on the usage of a credit card, and its key features that will perhaps change the way you will use your credit card.
First of all, be mindful of the fact that a credit card does not give you access to free money. All you stand to get is an interest-free period of 45-55 days, based on when the credit card bill is generated.
Second of all, any delay in clearing the credit card bill can cost you dearly.
So, before you start to believe that a credit card is a great financial tool that can turn around the way you shop and travel, then you are perhaps fantasising too much about its virtues.
Before you dive in, it’s wise to be informed about the top eight first credit card mistakes to avoid to ensure you’re using your card responsibly and effectively.
1. High interest rates: Credit cards charge a high interest rate on its dues. So, it is highly recommended to clear the credit card bill as soon as possible. If there are unpaid bills then you might end up paying a high interest in the range of 2-3 percent per month i.e., 24-36 percent per annum.
2. Credit utilisation ratio (CUR): This ratio calculates the proportion of total available credit that you have used so far. In order to maintain a good credit score, your credit utilisation ratio should be lower than 30 percent.
This means if your credit limit is ₹10 lakh then it is recommended not to use more than ₹3 lakh. It sounds slightly weird but true. ‘
Some credit card users, for this reason, subscribe to multiple credit cards so that they don’t use more than the 30 percent of CUR on any of the cards.
3. Multiple credit cards: Even if you are planning to keep your credit utilisation ratio under 30 percent, it is recommended to keep only a small number of credit cards. Using one card to clear the bill of another may work at times but it should not be turned into a routine.
4. Reward points: Whenever you use your credit card to buy something or to make payment for the services you bought, you are entitled to receive the reward points. These reward points keep getting accumulated and can be redeemed later on to get coupons.
This is considered one of the key incentives of using a credit card.
5. Jumbo loan: Credit cards can also enable users to get access to pre-approved jumbo loans. This means if you want to avail a personal loan then you can use your credit card to avail it without having to submit any documents.
6. Smart EMIs: Upon making an expensive purchase, you can stagger the payment of credit cards in EMIs. It is, however, vital to note that the credit card should have the facility of smart EMIs.
7. Cash withdrawals: One of the key blunders one can make is to use a credit card for making cash withdrawals. The interest charged on cash withdrawals is usually very high and should be avoided – to say the least.
8. Annual fees: Usually, credit cards carry an annual fee which could be waived off in some cases for the first year. So, if you believe that using the ‘credit’ comes for free then you are profoundly mistaken.
Remember that there are no free lunches in this world!
