A credit card is much more than a plastic rectangle; it’s a form of payment that can be used as a short-term loan. Used wisely, a credit card can help your finances by improving your credit score. Misused, a credit card can spell doom for your finances and your credit score.
Here is a comprehensive guide to help you choose and apply for a credit card. But let us first get familiar with the working of a credit card.
Understanding How Credit Cards Work
With a credit card, bank lets you make purchases on credit and repay at a later date. A credit limit is assigned to you and you cannot spend beyond your credit limit. Your income, credit history, job stability and a lot more comes into play to decide your credit limit.
Credit cards offer an interest-free period of 45-50 days. So, if you clear all your credit card dues on time, you would not have to pay any interest on the purchases that you have made.
However, cash advances (withdrawals) do not qualify for the interest-free period. If you cannot afford to pay the total outstanding amount on your credit card, banks give you the option of paying a minimum amount and roll-over the rest of the balance. This unpaid balance will attract finance charges (interest) on daily basis.
Pros and Cons of Credit Cards
| Pros | Cons |
| 1-Credit cards are easy to carry and use; definitely better than carrying a wad of cash everywhere. 2-They are a lot safer as the user has limited liability in case of credit card fraud. 3-Credit cards give you extra financial padding. You can use them in times of cash crunch. 4-With credit cards, you can earn while you spend, in the form of rewards and cash backs. 5-Several benefits are offered with credit cards such as airport lounge access, gift vouchers and freebies as milestone benefit. | 1-Credit cards have high rates of interest which can be anywhere between 25% and 45% annually. 2-Additional fees and charges are associated with credit cards such as annual fee, renewal fee, late payment penalty, etc. 3-When you miss payments on credit cards and continue spending too much, a spiral of debt starts. 4-Credit cards are usually quite expensive for international use except for some customized cards. 5-Missed credit card payments have a direct impact on your credit score. |
How to Choose the Right Credit Card
From earning simple rewards to getting travel benefits, you will find credit cards for all types of needs. The choice for the right card depends on the benefit that you would like to avail. So, the first step should be to decide your goals related to a credit card. If you are just beginning your credit journey, you might have only limited options. New users can only get approved for basic credit cards, yet you should choose the best among the available options. Sometimes, you may get emails about pre-approved credit cards; you can also proceed with them but you should know that getting pre-approved does not guarantee that you would get the card.
Given below are a few simple tips with which you can start your search for the right credit card-
- Analyse your expenses to find out where you spend the most and the least.
- Be honest to yourself about financial habits.
- Read about credit cards and make a list of the top benefits you would like to avail.
- Know your budget and how much extra would you be able to pay in EMIs.
- Decide whether you would like to pay annual fee on a card or not.
- Do not fall for the advertised offers; do your own research.
How to use a credit card
Credit cards can be dangerous if you don’t use them responsibly. But if you’re smart about credit card usage, you can enjoy a host of benefits and rewards and improve your credit score at the same time. Here’s how to use a credit card wisely:
- Only charge what you can afford: Consumers get into trouble because they use credit cards to spend money they don’t have. To avoid that, only charge purchases you can afford to pay with the money that’s in your bank account.
- Stay well below your credit card limit: While a credit utilization ratio of 30% or less can help boost your credit score, exceeding that 30% threshold can bring your score down. This means that if you have several credit cards with a collective limit of ₹10,000, you should make a point to never have more than ₹3,000 in charges at a single point in time.
- Always pay in full: You should pay your full statement balance every month. The moment you begin to carry a balance, you’ll automatically start accruing interest charges, which will compound daily until you find a way to eliminate your debt completely. Use our interest calculator to see how quickly interest can add up if you don’t pay in full.
- Find worthwhile rewards: One major benefit to using a credit card is that you’ll get access to whatever rewards your issuer is offering. Before you sign up for a credit card, make sure its rewards are both accessible and useful to you.
- Know your benefits: Credit cards not only serve as a short-term, interest-free loan of sorts, but they also reward customers for making purchases. Most cards offer additional benefits, like built-in purchase protection and coverage for stolen items.
- Review your statement: Make sure all the charges on your statement are legitimate. If you find any that aren’t, notify your card issuer immediately. Even a small charge you don’t recognize can be dangerous. Thieves often make small purchases to test stolen credit card numbers, and then charge much more if the test purchase is successful.
How to build a good credit score using credit card
After you’re approved for a credit card, it’s important to use the card in a way that will improve your credit score. Here’s what you need to do to build credit with a credit card:
- Pay on time: The best thing you can do for your credit is to always pay on time. Your payment history is the most significant factor in determining your credit score, and on-time payments will help you get excellent credit.
- Watch your CIBIL Score: Although there are multiple types of credit scores, the CIBIL Score is the one that lenders use most often. You should check yours at least once every few months to ensure you’re headed in the right direction. Some credit cards include a CIBIL Score tracker, but if yours doesn’t, there are also free ways to check your score online.
- Keep your balances low: It’s bad for your credit score if you use too much of your available credit. To avoid this, try to never use more than 20% to 30% of your available credit.
- Ask for a credit limit increase: After nine to 12 months of charging up balances and paying them off in full, consider asking the credit card company for a credit limit increase. A higher credit limit can make it easier to keep your balances below the recommended 20% to 30% ratio.
- Keep your account open: Don’t let your credit card go inactive for too long. Many banks will close an account if it isn’t used for six months or more. By making a small purchase with the card every few months or so, you can make sure that the card stays open and is reported to all three credit bureaus. One factor that affects your credit score is your average account age, so be sure to keep your oldest accounts around as to help boost your score.
Using credit card responsibly can go a long way in building a good credit score. You can do this by maintaining a fair utilization ratio and paying your bills in full. Start with great credit habits, take charge of your expenses and you will go a long way.
5
Very useful information
Informative 👍👍👍
Pingback: How to Maintain a Healthy Credit Score in India