Must Know: Using credit cards smartly

When Shania Twain sang; “We’ve created us a credit card mess; we spend the money we don’t possess. Our religion is to go and blow it all, so it’s shopping every Sunday at the mall’ not many realised that the song is as relevant today as it was in 2003. While credit cards may look like all sizzle and no steak, there are compelling reasons to include them in your financial tool kit to manage your personal finances. However, for credit cards to work to your advantage, it is crucial that you develop the habit to use credit cards responsibly. Here are five things that you should take note of when using a credit card.  

Be wary of initial costs: We all, at some point, have received a call from a sales representative from a bank making a compelling pitch about giving you a ‘free’ credit card. But the credit card you are being promised is anything but free. Credit cards come with a joining or an annual fee depending on the type of card you take and the credit card issuing company. While joining fee usually starts from Rs 200, an annual fee, which is what you pay for the service the bank provides, can range between Rs 500 to Rs 3,000 in a year. Some card issuing companies waive off these charges if you make transactions of a certain amount within a given period.

Revolving Credit: All credit cards come with an interest-free period during which you are not required to pay an interest on the outstanding amount. Usually, the interest free period is 20-50 days. After this you will have to pay an interest on the outstanding balance on the card. If you do not pay the whole of the outstanding amount within the due date stipulated by the bank each month, an interest rate on the expenses incurred on your card is charged at the rate of 3-5 per cent per month.  Take for instance, if your outstanding amount is Rs 15,000 and the monthly interest rate is 3.5 per cent you will be charged an interest rate of Rs 517 for the month of default. Moreover, if you pay the minimum amount due which is generally 5 per cent of the outstanding amount, you are still liable to pay interest on the remaining balance. 

EMI option: Banks allow you to convert your credit card spends into equated monthly installments (EMIs). The interest rate charged on this amount is lower than the annual interest charged by banks on an outstanding amount in case of revolving credit. “The interest rate on credit card outstanding is generally 36-42% per annum, and if you transfer the outstanding amount to an EMI option, the interest will come to 16-20% a year depending on the tenure you would be carrying these,” says Rajiv Raj, co-founder and director, CreditVidya. You may want to opt for these schemes as they also help ease your payments provided you don’t make multiple purchases on EMIs.  Also make sure to study the charges such as processing fee or interest rate before taking the plunge.  

Exceeding credit limits: Credit cards come with a spending limit which is the amount that you are eligible to spend and generally depends on the card type, card issuing company and your eligibility. Although, it is possible for you to spend beyond the limit when need be, charging more than your credit card limit could result in over-the-limit fees. Exceeding the limit could also result in a decrease in your credit limit, or other penalties imposed by the credit card provider.  For example, a transaction fee of approximately 2.5-3 per cent is levied on the amount withdrawn and is billed in your next statement. Charging more than your limit also hurts your credit scores because it is a strong indicator of poor credit management and high lending risk. The best is to always keep your balances low that will help you keep the best rates on your card.

Get more from rewards cards: Every time you swipe your card to make a purchase, the company automatically awards points in your account. The reward rates fluctuate between different credit card companies which generally allow you to accumulate points toward merchandise, gift cards, travel miles or cash back. For example, on a basic card, for every transaction of Rs 150, you can earn one-two points. The figure can be higher for premium and super premium cards. The number of points you earn for the amount spent also depends on co-branding wherein if the credit card company has tied up with a merchant or retailer, you may earn extra points for spending with your credit card in their stores. Credit cards vary widely on the purchases they reward and the benefits they deliver, so it makes sense to align rewards with your interests and goals and look for a card that fits your spending style.  

shipra@outlookindia.com