There’s no doubt that credit cards are very convenient to carry and transact with, especially when one is on holiday and it is unsafe to carry a lot of cash or when one is shopping for expensive products. Often, individuals are offered credit cards with great schemes directly by the bank. However, when we set out to purchase a credit card ourselves, there are numerous factors that have to be taken into consideration to derive the best benefits from using a credit card.
Interest is levied on the amount lent by the bank. It is generally charged at an annual rate and treated as a fee paid for the privilege of using the card.
You can opt for:
- Fixed rate card that maintains the same interest every month
- Variable interest rate where interest fluctuates every month and can increase your overall balance as the amount of interest charged increases
Fixed rate cards are preferable over variable cards since they offer more stability and you can predict how much you will be charged every month.
The credit limit is the maximum amount that you are allowed to borrow on your credit card without attracting a penalty. If you cross your credit limit by spending beyond the permitted limit, then you are likely to attract the over-limit fees. The 2009 Credit Accountability, Responsibility and Disclosure Act (CARD Act) prohibits issuers from charging the over-limit fees, but frequently overspending on your credit card can affect your FICO score. Often, customers with good credit scores receive credit limit extensions.
Apart from the applicable education cess and service tax, credit cards attract an annual fee that comprises of numerous heads and vary between card issuers as well as cards. Some of the heads that are charged as part of the annual fees are:
- Late payment charges
- Cash advances
- Request for increasing credit limit
- Balance transfer
Some of the fees can be negotiated with the card issuer at the time of purchasing the credit card, but it is completely at the discretion of the issuer.
Grace period is the number of days given to you to pay the credit card bill over and above the due date. The Grace period generally attracts no interest and is known as the interest free days. However, the cardholder must pay the minimum amount due before the grace period to enjoy its benefits. Generally, banks offer a grace period of 30 to 50 days to pay off the outstanding dues. If the customer pays off all the dues before the due date, then s/he will not attract an interest.
Balance transfer facility is offered by all credit card issuing companies. It enables them to transfer existing outstanding or debt from one credit card to another which is less used or new. The credit limit of the new card will be reduced proportionately. For instance, if you have a credit limit of Rs. 50,000 on your new credit card and you transfer a balance of Rs. 15,000, the credit limit will be reduced to Rs. 35,000. The balance transfer amount cannot exceed 80% of your credit limit. The process can take 7 to 10 working days or more; and while you are waiting for the transfer to happen, there is a chance that you may miss the repayment due date.
A benefit of credit card spending is the reward points one earns every time they spend using the card. These reward points mostly do not have an expiry date and can be redeemed in the form of free airline miles, discounts on purchases, cash backs etc. Many credit card issuers have their own product brochures from which one can choose products, shopping vouchers, etc. to redeem their points. With some banks and card issuers, higher reward points are earned by card holders with higher credit limits. In some cases, reward cards attract annual fees, so even if the rewards are free, the card isn’t.
Cash Withdrawal Facility
Credit cards issued by banks come with an ATM PIN so that you can withdraw cash from your credit card from the ATM. However, it is recommended to use this facility only when one is in urgent need as the cash withdrawn against the credit card from the ATM attracts a high interest rate.
Often credit cards come with various discounts and additional benefits about which you must get full information from the sales executive. Customers can also negotiate upon the fees and rates; however, it is up to the bank’s discretion to make any amends for your benefit.