10 Things You Should Know Before Getting Your First Credit Card

December 18, 2021 Mutual Fund

A credit card is a pre-eminent financial tool that opens a short-term line of credit and increases the purchasing power of the cardholder. With the alluring benefits available on credit cards, getting the first credit card is a huge milestone for many youngsters who tempt to get their first credit card as soon as they start working. However, getting your first credit card can be intimidating due to the several technicalities that come right from searching for a suitable credit card to paying your first credit card bill! This article will elucidate 10 crucial things you should know before getting your first credit card. So, read on, if you are planning to get your first-ever credit card soon.

1. Meaning:

Many individuals get themselves a credit card without knowing what it is and how it works. However, such an ignorant act can wreck your savings as well as credit history. Therefore, it is essential to know how the credit card works and whether you need one. Knowing the basics before getting your first credit card can save you time and money.

A credit card is a type of plastic card issued by a bank or Non-Banking Financial Company (NBFC), which lets you borrow money from the pre-approved line of credit for the purchases of goods and services, balance transfer, cash advances, etc.

Both credit card and debit card look identical and carry unique 16-digit card numbers but the key difference between them is that a debit card uses the money from your bank account (which you already have), whereas a credit card uses money from your pre-approved credit limit (which you actually do not have).

2. Types of Credit Cards:

With the plethora of credit card issuers and the types of credit cards they offer, choosing the right credit card can be a daunting task. Instead of applying for the kind of credit card used by a colleague, friend or family member, it is necessary to apply for the credit card that is best suitable for you. There are basically two types of credit cards; secured credit cards and unsecured credit cards.

• Secured Credit Card: This type of credit card is primarily issued by banks against collateral, which is typically backed by a fixed deposit. This means, the banks ask for a fixed deposit, and provide you with a credit card with 80% to 85% of the fixed deposit amount. That said, if you make a fixed deposit of Rs 5,00,000, you will have a credit card limit of approximately Rs 4,00,000. Some banks offer a credit limit of 100% of the fixed deposit amount. However, banks generally have the minimum and maximum credit limits for secured credit cards, which may vary from card to card.

  The bank does not hold any risk by issuing a secured credit card because it is backed by a fixed deposit. Your bank puts a lien on the fixed deposit linked to the credit card, which ensures that no one can withdraw the fixed deposit unless the bank removes the lien. So, in case you default on the credit card payment, the bank or the card issuer can recover the money from your fixed deposit to clear the dues. This type of credit card is ideal for you if you do not have a good credit score or do not fit into the income criteria of the unsecured credit cards.

• Unsecured Credit Card: When speaking of a credit card, people generally speak of an unsecured credit card. These cards are issued without any security deposit and hence, the credit card issuers consider several factors while issuing them. Therefore, your income, credit score, credit history, etc. play an important role in the approval or rejection of your credit card application.

Apart from the basic difference of how you qualify for the card, both these types of card offer similar benefits. Once you know whether you need a secured credit card or an unsecured credit card, you should focus on its sub-types. For example, if you prefer to do everyday shopping through a credit card, then you should opt for a Shopping Credit Card that can offer you maximum cash backs and rewards, whereas if you are a frequent flyer, then you should opt for a Miles Credit Card. To avoid opting for a credit card by getting influenced by the advertisements and offers, it is vital to do a thorough comparison of the most suitable cards and choose the card that is best suited to you.

3. Credit Card Statement:

Every month you will receive a credit card statement, which is a summary of all the debit and credit transactions done during the billing period. It is advisable to carefully review your statement every time you get it, as it can have some errors, which you can get corrected immediately. Besides, by reviewing the statement you will come to know if there is any fraudulent transaction and you will be able to immediately bring it to the notice of the credit card company.

4. Due Date of Your Bill:

Your monthly statement will have a payment due date mentioned on it. The bank/ NBFC charges interest as well as late payment penalties, if you do not pay your dues within an interest-free credit period, which starts from the purchase date to the payment due date. It can be anywhere from 18 to 55 days, depending upon your payment due date. Moreover, the Annual Percentage Rate (APR), which is similar to a compounded interest rate, on credit cards is very high compared to other types of loans and generally ranges between 15% p.a. to 45% p.a., depending on the credit card. To ensure you do not miss timely payments, it is advisable to register for an auto-payment facility offered by most credit card issuers that automatically deduct the credit card payment on the due date from your registered bank account.

5. Minimum Amount Required to Pay:

While paying the credit card bill online, you will see two options; ‘Pay Minimum Amount Required’ and ‘Pay Full Amount’. The minimum repayment amount is typically 5% of your total credit card outstanding amount. People, who create huge debt by recklessly spending on their credit cards, choose the minimum amount to pay as they cannot afford to repay their huge unplanned spendings. However, by doing this, you will be charged with the Annual Percentage Rate on the unpaid or outstanding amount until it is fully paid. The APR on the credit card is usually very high, which ultimately increases the outstanding amount. This practice can lead you to a debt trap. Hence, you should always pay your credit card dues in full. If you cannot afford to pay the full amount for some reason, try to pay as much as you can, instead of paying only the minimum required amount.

6. Charges and Fees:

Apart from the Annual Percentage Rate, credit cards come with several fee and charges like joining fee, annual fee, late payment charges, foreign transaction fees, cash withdrawal fees, etc.

Joining Fee: It is a one-time fee charged by the credit card issuer for providing the credit card facility. The joining fee can be very high for high-end credit cards. However, many starter credit cards come with zero joining fee or offer rewards of the same amount as the joining fee.

Annual Fee: Annual fee is similar to account maintenance charges, which are charged every year. Although many banks and NBFCs offer a variety of lifetime free credit cards, most high-end cards come with an annual fee. For the first-time credit card users, it is advisable to opt for the starter credit cards which come with zero to low joining and annual fee, so that you will not have to pay unnecessarily until you become habituated to using credit cards.

Late Payment Charges: If you do not pay the minimum repayment amount before the due date, then you will be charged with the late payment charges. The minimum repayment amount is generally 5% of your total credit card outstanding. However, to avoid paying a high APR, you should always pay your bills in full and not just minimum repayment amount.

Foreign Transaction Fee: It is a fee charged to you on international transactions (outside India).

Cash Withdrawal Fee: During a cash-crunch many credit card holders tempt to withdraw cash from their credit cards. However, you should keep in mind that credit card issuers charge heavy fee for cash withdrawals.

Balance Transfer Fee: Transferring credit card balance from one card to another is quite possible but you will be charged with a balance transfer fee by the credit card issuer, which generally ranges from 1% to 5% of the amount transferred.

7. Equated Monthly Instalments:

The ability to make purchases on Equated Monthly Instalments (EMIs) is one of the primary reasons why people opt for a credit card. This facility increases the purchasing power of the cardholder and charges an interest and one-time processing fee for such loans of up to two years. Moreover, for a short-term credit of 3 to 6 months, certain credit cards offer no-cost EMIs (or zero per cent EMIs) on purchases made with certain merchants. This facility helps you to pay your dues on EMIs without any additional documents and also earns you reward points. However, make sure you do not utilise more than 30% to 40% of your credit limit to ensure maintaining a good credit score.

8. Terms and Conditions:

The credit card offers several reward points and cash-backs when you spend through a credit card. However, there could be certain terms and conditions applicable for receiving or using those rewards, such as a minimum number of reward points to claim, the reward points may get expired if not claimed within 90 days, cash back will be credited after 30 days or within 180 days of purchase, etc. Apart from the rewards, there could be many more terms and conditions relating to APR, fee and charges, billing cycle, credit card statement, payment, etc. Opting for a credit card without knowing all the terms and conditions can lead to future disputes. Therefore, before availing of any credit card, you should carefully read the fine print and understand the terms and conditions.

9. Use Responsibly:

It is crucial to use your first credit card responsibly as it can make or break your credit score. Timely paying the credit card dues, not overspending, maintaining the credit utilisation ratio below 30% to 40%, will ensure you create a good credit history, which will help you when you apply for other types of loans in future. However, overspending on the credit card, not paying the full bill before the due date, not properly cancelling the unused credit card, etc. can negatively impact your credit score.

10. Credit Card Frauds:

While using a credit card, you must take necessary precautions for your financial security. Credit card frauds have become very common these days and the fraudsters generally target the amateurs who are new to credit cards. Click here to read more about most common credit card frauds and how to prevent them.

To Conclude:

These are the 10 things you must know before getting your first credit card. Knowing the basics in advance will avoid complications in the future and ensure smooth use of credit cards. Furthermore, while applying for your first credit card, you should not expect to have a high-end card since those cards are generally offered only to individuals with very good credit scores and credit history. Instead, opt for basic credit cards that suit your requirements and have minimum annual fee, so that you can build a good credit score with them. Using your first credit card ‘responsibly’ will open the doors for new and desired credit for you in the future.

This article first appeared on PersonalFN here