What You Must Know Before and After Getting A Credit Card In India
Swipe it now, pay next month (and if you want, only fraction of the amount due), and win instant reward points on your purchase may look as ‘as good as it gets’—and maybe it is.
Partly because of these unique advantages offered by credit cards and partly because they are so damn convenient to use, almost everybody wants a wallet full of them.
Nevertheless, there are several things to consider before and after getting a new credit card.
5 things to keep in mind before getting a credit card
- How do you plan to use it?
The first and foremost thing to consider is why you need the card.
Do you want it because of its offers? Do you plan to use it as your primary credit card, that is, to pay most of your everyday bills and more? Do you want to keep it as an emergency credit card? Or do you want it for the excellent one-time offer that it is offering?
The idea is to buy a credit card that perfectly suits your need—and gives no other extra benefits. The last bit is important too, because unneeded benefits can sometimes lead to substantial extra expenditure which could unnecessarily put strain on your finances.
If you want a card for emergency situations, pick a card with the minimum interest rate and without other frills. The lower interest rate will ensure that you’ll have to pay a minimum extra charge in case of a cash withdrawal or minimum payment while the absence of attractive features will prevent you from using the card unnecessarily.
In case you want a card because of the rewards it offer, ensure that the offered rewards suit you. For example, a card with an attractive cash-back scheme on fuel refill is practically useless for you if you travel in public transport more often than not.
- Interest rate applicable on the card
Those who are financially disciplined wouldn’t be bothered about interest rates, although knowing about them wouldn’t hurt. However, the interest rate could be a big factor for those who frequently fall back on their payments. (This, by the way, is a bad habit and can hurt your CIBIL score badly. More on this later, though.)
- Various fees and penalties
You’re happy that your bank is offering you a free card, but did you check how free your ‘free’ card really is?
Some cards are free for only first year, after which the bank charges an annual fee per year. Before taking a card, look beyond the ‘no-joining fee’ feature; read its details to see if the card is really ‘free’ or if you’d have to pay an annual fee after the first year.
Another thing you might want to consider are the penalties levied in case of late payment or non-payment. While you should clear all your bills on time, it is best to learn all charges upfront to prevent any nasty surprise when you open your bill statement.
- Credit limit
When it comes to credit limit, remember that you don’t always get what you want but you can choose less if you are being given more.
Your credit repayment history and your current income are two factors that banks consider, more than any other thing, when deciding on how much credit limit to offer to you.
Keeping your limitations, if any, aside, you would ideally want a card with a credit limit that is appropriate for the purpose for which you are taking that card. For example, if you want a card for everyday purchases, you’d want one with a substantial credit limit, enough to cover you monthly everyday shopping transactions.
On the other hand, if you are a causal user who uses the credit card occasionally, you’d want a credit card with a lower credit limit even if the bank is willing to offer you a higher credit limit. We’ll look at why you should do this in the next section of the article, but this is one occasion where taking less when being offered more makes better sense.
- Reward Programs
If the whole reason behind getting a new card is to avail the various offers and benefits, ensure you pick the one that gives what you want. For example, a movie buff who doesn’t travel much won’t benefit from picking a card with frequent flier points. What he would want instead is a card with a good discount scheme on movie tickets.
3 things to keep in mind after getting a new credit card
Ok, so you now have the card you wanted. However, before you start using it at every opportunity, here are a few things you’d well to keep in mind.
- Spend within your limits
This might sound like a parental advice, but that’s not the point. The point is that this is the best—even if it is clichéd—advice you can get on credit card usage.
Two things might happen when you overspend—and neither is for your good. One, your financial budget might go for a toss. Two, you might not be able to pay the credit balance on time, which in turn can—and often does— lead to more problems like:
- late payment fee
- default payment
- a drop in credit score (which can inflict further damage by making it difficult for you to get a new credit card or loan)
In short, overspending can set you off on a downward financial spiral, coming out which may take much hard work and time.
- Don’t use the card to its full or close to full credit limit
Regularly using the card to its limit is seen by banks and lenders as ‘credit-hungry’ behavior. They believe that such a person is dependent on credit, without which he would not be able to sustain himself financially. In other words, this kind of a person is a high risk for banks and lenders, and they will not like to extend him any more loans, at least not until his credit pattern changes.
The other thing is that high credit usage increases the chances of late payment or defaulting on payment, both of which negatively affects your credit score.
You should not use a credit card for more than 50% of its limit. In case you need to, instead of increasing that card’s usage, get a new card. This way you’ll able to distribute expenses evenly and keep your credit report clean.
- Defaulting payment is not an option—nor is settling the bill
You’ve used your card for far more than you can repay and overtime a substantial balance has buildup. Where do you go from here?
This is not a nice situation for anyone to be, but if you’ve got into it, see it through no matter what. You’ll not be able to get a new credit or loan for at least next seven years if you default on a credit payment. Seven years is the bare minimum; the ban may last for your lifetime.
With recovery agents calling you every day and urging you for a settlement, the latter may appear as a let off—but it isn’t.
A settlement too reflects negatively on your credit report and makes you a high-risk prospect in the eyes of lenders. Whether you default or settle the bill, the bottom-line is you’d not be able to get a new loan.
The best way—and also the toughest—is to pay the bill in full. Convince your bank of your good intentions and request a meeting with a representative to chart out a repayment plan which allows you to pay the balance without breaking your back.
- Don’t take more credit cards than you need
A free credit card is good, but only when you need it. If you already have enough cards in your wallet, resist the temptation of getting another one. You don’t accrue any benefit in your credit report from a card which you use rarely, even if you pay its bills on time every time. So why keep it?
Experts recommend one to three credit cards, depending on your income and needs, and using each card often enough so that its usage serves as a proof of your financial discipline in repaying credit, which is what lenders are concerned with, apart from your monthly income, when evaluating your loan application.
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