Don’t blame your credit card company for spiraling expenses and charges!

Don’t blame your credit card company for spiraling expenses and charges!Instead, learn to manage your credit cards, enjoy the benefits of it.

Gone are the days when having multiple credit cards symbolizes social status!

One of my friends had eight credit cards in his early thirties, when he was asked for the reason for having so many credit cards — he often replied, “My wallet has ten card slots, more cards kept on those slots — better my social status”.

I had four credit cards initially; reason was that all those cards were free of charges or no annual charges (at least notionally). I hardly used the rest of the cards except the Citibank Indian Oil credit card. One of my cards had some amount unpaid for a long time (I used that card only once), I completely forgot to pay it on time (did not use it regularly & did not activate the automated reminders as such).

I paid thrice as much of the actual due amount after two years (including late fees and tax thereon).

I realized; there is no point maintaining multiple cards. One credit card with required limit, minimum annual charges & offers good deals based on your requirement — is ideal.

Let us understand the product & the ideal way of managing it.

Credit Card Management

Credit cards can be a free or minimum cost option to borrow when managed rightly.

However, if not managed well, will lead to increased debt burden and financial loss.

Definitions:

Credit cards allow us to access borrowed funds issued by a bank (as opposed to a debit card where payment can be made only when there is a sufficient cash balance in linked bank account).

Anatomy of a Credit Card

There are several categories of credit cards available today (e.g. reward, cashback, travel, student, business etc.) which are issued by banks or financial institutions.

However, there are two major payment-processing network providers — Visa & MasterCard. Neither company is involved in extending credit nor issuing cards, they collaborate with financial institutions and offer electronic payment networks.

Can you apply for credit cards?

Off course!

Eligibility Criteria:

Age: You must be at least 18 years old. However, some banks have a minimum requirement of 21 years. The maximum age requirement also differs, and it generally goes up to 60 years.

Annual income: Your annual income determines if you are eligible for a particular card. The minimum salary required to apply for a credit card in India is around Rs.3 lakh p.a. Although, the income criteria changes bank to bank.

Nationality or residential status: Citizens, residents, and non-residents can apply. However, a few cards are only available for Indian citizens.

Factors Affecting Your Credit Card Eligibility

Besides the above-mentioned criteria, there are certain factors that also determine your eligibility:

Credit score: Your chances of getting a credit card increases when you have a reasonable credit score. If you have a bad score, your application will most likely

be rejected. A good credit score is anywhere from 750 to 900.

Existing Debt: Your card provider will also consider your credit utilization ratio. If your dues exceed the granted limit, it may affect the approval of your application.

Employment: Another factor that affects your eligibility is your employment status. Staying in your current job for more than a year can improve your chances of getting a credit card significantly.

What is a Credit Limit?

Credit Limit is the maximum amount that you can spend using your credit card at any given time. The credit card provider sets the limit.

For instance, if your bank provides you a credit card with a limit of Rs.1, 00,000, you cannot spend beyond that amount on your card.

The credit limit varies based on the type of credit card and is determined based on your eligibility (income etc.).

Credit limits can be increased when required by requesting issuer.

Who Issues Credit Cards?

Banks and financial institutions issue credit cards through their branches.

You can apply for a credit card physically through a branch or Online.

Annual Maintenance & Other Charges:

The annual fee is charged once in a year and the amount varies from card to card. Sometimes, banks offer free credit cards, which means that there will be no joining fee or annual fee on the card for a certain period or for a lifetime.

Most of you only look at the annual fee of the card but there are several other credit card fees & charges, which you must be aware of -

e.g., late payment charges, over limit fee, cash withdrawal fee etc.

Billing Cycle:

All the transactions conducted during the period will reflect in the credit card statement of the month. For instance, if the billing date or the statement date of your card were third of every month, your billing cycle would be typically from fourth of previous month to third of the current month.

Be aware of billing cycle of your card and use it for your advantage.

Should you hold a credit card?

Answer is “YES”

Advantages of Credit Cards:

> An additional line of credit, can be used in emergency or for regular expenses.

> When used prudently, one can improve their credit score.

> Offers bonuses, cash backs, rebates, reward points etc. (my credit card reward points can be used for buying fuels).

> Having a credit card also offers financial independence at least for a specific time period, sometimes we run out of cash and emergency comes suddenly.Thus a credit card could save us from borrowing from relatives.

> Easy for payment — card details can be saved in gateways for regular purchases.

Are there disadvantages?

YES…

x Credit card company levies high interest on the unpaid debts, more than any other loans in the financial system.

x Additional fees & Annual Maintenance fees can be levied.

x Tempting to overspend, easy access to money which is not yours.

x Risk of lost card, unauthorized use and payments would be your liability.

Best practices for ideal credit card use:

Ø Safe guard your card from public exposure and theft.

Ø Be disciplined about paying the dues on time (not on the last day).

Ø Always pay the full amount due (not minimum dues); minimum payments attract interests.

Ø Spend about thirty to forty percent of the credit limit; never spend beyond assigned limit. Maintaining a right spend habit improve credit scores.

Ø Never withdraw cash using credit card; fees are significant.

Ø Chose EMI option for big-ticket purchases only when the EMI conversion is free of interest.

Ø As you have a credit line, don’t just buy anything. Remember you have to pay the credit card bill in the next cycle.

Ø Map your credit card as a biller with your bank account to ensure automatic payment before due date (direct debit).

Ø Regular expenses also can be incurred in your card; this would increase the chances of obtaining reward points and other offers. Use your particular credit card for the purchases where there are specific offers on your card (e.g., SBI IRCTC card offers special rewards on train ticket booking).

Bottom line

Apply for a low cost credit card. You can leverage on low fees and charges to make the most of your credit card. You need to try to maximize the value of your spends with the help of a credit card that best meets your financial requirements coupled with a good credit management.

When used prudently, you can save reasonably on various expenses.

One should definitely own a good credit card that matches with your spend preferences.

Thanks for reading this article…

Koushik Bagchi