Sadiya Upade | Jul 26, 2015 02:15 PM IST
Credit cards can be thought of as plastic money. Issued by financial institutions (mostly banks), they offer money (credit) that needs to be repaid within a stipulated time.
Credit cards are a handy way to make payments and keep a record of your purchases. All you need to do is swipe your credit card online or at retail stores and you are done. Many also use these cards to pay monthly bills, insurance premiums etc.
Besides being convenient, there are other benefits of using credit cards too.
1) Cash back: Many banks offer cash back opportunities if you use your card to pay monthly bills (electricity) or for grocery purchases. Besides, online shopping portals too have cash back offers on various products.
2) Reward points: Credit card companies offer reward points for any purchases you make with your card. For example, HDFC Bank gives 2-5 reward points for every Rs 150 spent using your card. You can then use these points to purchase gifts (available on the company’s rewards page).
3) EMIs: If you are making a big-ticket purchase (TV, refrigerator, laptop), you can easily convert it to affordable monthly instalments. Banks usually charge interest for conversion to EMIs.
4) Grace period: One of the main advantages of using a credit card is you can defer your payments till your bill your due. Banks offer a maximum 50-day grace period for paying back your dues.
5) Safety: Credit cards are safer than debit cards as in case of fraud you are not out of money immediately. Payment gateways like Visa, Mastercard also offer additional password protection while using the cards online.
What is the procedure for getting a credit card?
The easiest way to get a credit card is to apply with a bank where you already have an account.
Banks, other institutions that offer credit cards usually check certain parameters to check your debt repayment capabilities like your monthly income, credit score etc.
Applying for a card with a bank where you have an account can also help you get an enhanced credit limit as your income/spending grows.
Different banks/companies offer different offers on their credit cards, so check the promotions/discounts being offered. For example, if you want offers related to entertainment, you can opt for cards that give you discounts on movie tickets, plays etc. If you are the kind who dines out a lot, you can take a dining special card as an add-on. Some banks offer cash back offers on petrol, diesel purchases, while others give you better online discounts. So do your research before applying for a card.
Once you have done your research, you need to submit the valid documents (identity, address proof) to get that card.
Keep in mind to check the annual charges the bank is levying on the card. Usually, the annual charges are waived for the first year. Some banks also offer lifetime-free credit cards, but check to see if all charges are indeed being waived off.
How many credit cards should you have?
If you are already using a credit card, you might be tempted to go for more lured by the offers being given by credit card companies. But how many cards do you actually need?
Credit limit: If you feel that the credit limit on your existing credit card is not sufficient, then you may apply for one more card. But if you have a good payment history, credit card companies usually reward you by enhancing your credit limit periodically.
Convenience: Sometimes merchants don’t accept all cards, like some may accept only Visa and others only MasterCard. So if you have only one kind of card, you may not be able to make that payment using your credit card. Also, sometimes your card may get rejected for technical reasons. In such cases, a backup may be useful.
Benefits: Some cards offer privileges/good deals for specific purposes like petrol purchases, dining, air miles etc. If you want to take advantage of these offers, you make opt for a second card.
While credit cards offer convenience, multiple credit cards come with drawbacks too.
Credit history: It is difficult keeping track of payment dates of multiple cards. Non-payment of dues can affect you in multiple ways. For one, you will have to pay interest to the credit card company. Second, it can also affect your credit score and ability to get loans in the future.
Impulsive buyer: If you are an impulsive buyer, having multiple credit cards can make you spend without thinking about your repayment capability.
Multiple credit cards require you to be responsible and hence experts don’t recommend having more than two or three credit cards.
Types of credit cards
Credit cards come with different fees, interest rates and reward programs. You need to check for the ones best suited to your needs while applying for one. Here are the different types of cards offered by banks, other financial institutions:
1) Standard Credit Cards: These are general purpose cards that are most commonly issued to users. They need no deposits and credit limit is decided by the credit card.
2) Premium Credit Cards: These are the gold and platinum cards. They come with more offers and come with higher credit limits. Some perks might include concierge services, exclusive airline lounges etc.
3) Secured Credit Cards: To use secured credit cards, you need to deposit money with the company. Your credit limit is decided
based on the deposit. These cards usually have higher rates of interest and an annual fee. They are mostly used by people with a tarnished credit history.
4) Prepaid Credit Cards: Here, the user loads the card with money. It is similar to a debit card expect that it is not tied to a bank account.
5) Specialty Credit Cards: These cards are offered through affiliations and partnerships with major brands. For example the PVR Kotak Card offers two free movie tickets at PVR screens every month on spending Rs 7,500 per month.
Difference between a charge card and a credit card
Customers usually get confused between a charge card and a credit card. While quite similar, with charge cards you need to pay the outstanding amount in full each month. And because you are not allowed to carry forward dues from month to month, there are no interest rates associated with the charge card.
If you don’t pay the outstanding in full, charge cards can attract a penalty of up to 5%. For example, if the outstanding after the due date is Rs 20,000, then at 4% interest you have to pay a penalty of Rs 800. In case of credit cards, you can just carry forward the dues after paying the minimum amount due.
The major benefit of a charge card is that it has no predefined limits like in credit cards. The usage pattern, credit history and financial capacity of the user decide the usage limit. One usually needs to have a good credit score to qualify for a charge card.
Just like credit cards, you can earn rewards and get benefits from using your charge card.
A few things to keep in mind are that annual charges are more for charge cards. Also, prepayment of dues attracts a penalty in case of charge cards.
Charge cards can help in creating a good credit score as you have to compulsorily pay the dues if you don’t want to attract penalties. You are also less likely to fall into a debt trap with charge cards.
Should you transfer your credit card balance?
If you have overspent on your credit card or have been revolving dues on a monthly basis, a credit card balance transfer can you give the much-need breathing room to pay back your dues.
A credit card balance transfer is where you transfer your outstanding dues from one credit card to another credit card of yours or to a totally new card. A balance transfer can give you few more weeks to make a payment and is especially useful in case of short-term liquidity crisis.
It can also help you consolidate dues from multiple credit cards to a single card.
Consider a balance transfer if the new card company is offering you better interest rates. If you are the kind that keeps carrying forward balance every bill cycle, going for a new card at lower rate makes sense. Interest is charged on the amount left unpaid after the due date. So if you are revolving credit card user, you can save money.
Another reason to opt for a balance transfer is if the new card issuer is giving you better rewards and deals.
But remember that balance transfers don’t come free of cost. The interest rate on balance transfers ranges between 0.5% and 2%. While many companies offer lucrative deals like transfers at lower or zero interest rates, this is usually applicable only for a time frame. So be sure to check the time period for which the interest is being lowered/waived off.
Different banks have different criteria for balance transfers, so check the charges carefully to make sure you don’t end up paying more than what you are to your current card issuer.
While a balance transfer per se may not affect your credit score, making multiple inquiries for balance transfers can impact your score.
You should also note that the amount you transfer to a new card cannot exceed 80% of its credit limit.
Should you take a loan on your credit card?
Loans against credit cards are similar to ¬¬personal loans, only they don’t need any documentation.
While a personal loan is among the quickest options for getting a loan, it still requires some documentation and may take a few weeks to process. So if you are looking for money immediately, a loan against your credit card could help you out.
These loans work out to be cheaper than withdrawing cash on your credit card. You are also likely to be eligible for more money in case of a loan than in case of cash withdrawal.
But the interest rates on such loans are generally higher than personal loans. Otherwise, it works just like a personal loan, with a processing fee, repayment in monthly instalments and prepayment facility, though there may be extra pre-payment charges.
The big downside of taking such a loan though is that banks may limit cash withdrawal facilities on your credit card to the extent of the loan you have taken. Many times the credit card limit will also be curtailed, impacting the usage of your credit card.
Another issue is that you will likely have to pay service tax on interest, which you don’t need to in case of a regular personal loan.
Loans against credit cards are not available to everyone and banks only provide these to customers with high credit standing. But if you are in dire need of money, you can explore this option with your credit card issuer.