Q. I am a 22-year-old, employed with one of the big 4 accounting firms. I have recently received my first credit card. I come from a conservative background and no one in my family has a credit card. I keep reading articles on the net about how a credit card can lead to financial ruin and I am utterly confused about whether I should use my credit card at all. Can you please elaborate on do’s and don'ts pertaining to a credit card for a first-time user.
Nimisha Mehta, New Delhi, Delhi
A credit card is essentially a line of credit wherein the credit card holder gets credit for an interest-free period of typically 30 days and also receives certain benefits such as reward points, airport lounge visits, online shopping discounts, etc.
However, in the event the credit card holder is unable to pay back the due amount on the due date, he/she will be liable to pay interest as well as a late fee. The interest charged by credit card companies is typically much higher than charged in the case of similarly situated products such as personal loans.
For first-time credit card users, please see below a list of do’s:
- Pay your bills on time: It's important not to miss any credit card payments. If you don't pay on time, you'll not only have to pay late fees and interest but your credit score will get impacted too. This makes it harder for you to get credit in the future. If you pay on time, you can on the contrary improve your credit score and get credit in future at favourable terms, i.e., at a lower interest rate.
- Pay the full amount: At month's end, your credit card app will offer you to either pay the full amount or pay the minimum amount. It is strongly recommended that you pay the full amount due, if you elect to pay the minimum amount, you will be liable to pay interest on the remaining balance. As stated above typically the interest on the balance amount is high and may lead you to a debt trap.
- Understand the billing cycle: Though most credit cards offer a 30-day billing cycle, some cards even offer a 45-day billing cycle. Additionally, some credit card companies allow for a grace period of 7 days - if you make the payment during the grace period you will not be liable to any penalty or late fees.
- Choose a credit card with a low interest rate: If you work at a job where you do not receive a fixed monthly salary and have to rely on your credit card in case of a financial emergency it is important that you choose a credit card which charges a low-interest rate. Most credit cards mention interest rate in the form of monthly interest rate, it is important that you convert the monthly interest rate to an annual interest rate before you apply for a credit card.
- Use your credit card prudently: Credit card is a good way to improve your credit score and get rewards and cashback. However, you should view your credit card limit as cash in the bank. Unlike your savings, a credit card is not an asset but a liability which you need to clear monthly at the end of the billing cycle. It is important that whenever you use a credit card you keep in mind that you will have to clear the amount within the next 30/45 days.
- Choose a credit card as per your lifestyle: Different credit cards offer different kinds of benefits, shopping credit cards offer cash back in case of online shopping, travel credit cards offer air miles and a waiver on fuel surcharge, and dining credit cards offer cash back whenever you choose to eat out or order food online. Essentially, there is a credit card for everyone, it is highly recommended that you choose your credit card after understanding all the benefits on offer.
- Watch out for credit card fraud: Always keep your payment records and compare them to your credit card statements before making your monthly payment. This will ensure that your credit card is not misused. If you notice a fraudulent charge, you should contact your credit card company right away.
- Always read the fine print: Interest rates, late fees, yearly fees, grace periods, and default rates vary from credit card to credit card. Read the small print and ensure compliance with the terms and conditions and cardholder agreements. As per Reserve Bank of India guidelines all credit card companies are required to display the most important terms and conditions pertaining to the credit card on their website, do check those out before you apply for a credit card.
- Check your eligibility for special offers: Most credit card companies have special offers for employees of MNCs and state and central government. Do inquire about your eligibility for such offers.
- Use apps to track your credit cards: Multiple fintech companies have launched credit card tracking applications, these companies not only remind you to pay your credit card due on time but also analyse your credit card statement for any fraudulent charges. Some of these apps also keep track of all the benefits which come with your credit card.
Below is a list of don'ts for credit card usage.
- Don't forget to pay: As stated above it is important that you remember to pay credit card dues on time, otherwise, it may lead to you getting trapped in credit card debt.
- Don't get cash advances with your credit card: Withdrawing cash using your credit card typically involves a high fee typically 2.5% of the amount you withdraw. Therefore you must remember to not use a credit card for cash withdrawals unless there is an emergency.
- Don’t use credit cards everywhere: In some cases using a credit card may lead to the imposition of additional charges. An illustration of this is using a credit card for fuel. If you credit card for fuel your payment will attract a fuel surcharge which is a fee imposed by the credit card company. Another illustration will be using a credit card for booking rail tickets. If you use a credit card on the IRCTC portal, an additional fee will be applicable on your transaction. Therefore before making any online payment make sure there is no additional fee payment associated with credit card usage.
- Don’t use a credit card on non-trustworthy websites: Multiple websites are built with the sole purpose of duping innocent customers. It is strongly advised that you use a credit card for online payment only on established websites.
Credit cards can provide you with a lot of benefits without any cost, however, first-time users should be mindful of the fine print and should always ensure timely payment. Most importantly one should remember that credit cards should not be used as a source of credit because of the high-interest rate typically charged by most credit card companies.
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Note: This is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.