It’s the end of the month and you’re broke, but the phone you always wanted is going on sale. Your friends are finally going on that Goa trip, but you are short on cash. In such situations, more often than not, a credit card becomes your saviour. And if you don’t own one, you really wish you had one in such situations.
While credit cards are like a quick short-term loan, they also are an easy way to fall into a debt trap, leaving many wondering if they should even own one.
When is the right time to get a credit card?
While most experts say that getting a credit card early on helps in building a healthy credit profile and CIBIL score, being financially disciplined is extremely important to avoid a debt trap.
Parijat Garg, Senior Vice President, CRIF High Mark says, “The best time to get a credit card is before you need one. I see people preferring to use debit cards over credit cards. Using a credit card makes more sense as long as one is disciplined to spend within limits and repay in full within the due date.”
If you are someone who spends money extravagantly, then you should probably not be getting a credit card. Experts say that financial discipline is extremely important. If not, owning a credit card could be self-destructive because it creates temptation for more spending.
Also ensure you have inculcated discipline in terms of making payments on time, especially for bills. This is because if you miss your credit card bill payment date, you will attract a higher rate of interest, eventually putting you into a debt trap. And it will also prove to be counterproductive as delaying your credit card payments will affect your credit score.
Why it helps to have a credit card
But if you don’t have one, you're not building a credit history, says Lovaii Navlakhi, founder of International Money Matters, a financial planning, investment advisory firm.
Having and using a credit card properly helps build and maintain credit score too, which can enable one to explore a loan for buying a car, house, etc. in future. “Credit Cards come in handy during travel abroad and for online purchases too. Now there is an app that incentivises repayment on credit cards for customers with good credit score,” Parijat says.
Credit score is essentially your ability or the likeliness of replaying your debt. In India, CIBIL score is what is most widely used. CIBIL Score is a 3-digit number between 300-900 that shows your credit history, rating and report. The closer you are to 900, the better your credit rating is.
When you avail a loan, banks often check your credit score basis which they approve or reject your loan application.
Credit cards for beginners
You can start off by applying for a credit card with the bank where you hold a savings account or better still, where you have a salary account.
If you are employed in the public sector or with reputed private companies, you may be eligible for a credit card based on your salary slip itself.
Parijat says that one should apply for one of the basic cards to begin with rather than going for the most premium card the bank has to offer. This will improve the chances of approval, and you can get your card upgraded after a few years.
Specially designed credit cards are now being offered by banks to those who have just joined the workforce.
If one does not have a credit history or if you have been working with not such a marquee employer, you may have faced rejection in the past. But that’s not a problem too. One can apply for a secured credit card against a fixed deposit – one can begin with as low as Rs 20,000.
According to HDFC, the ideal credit card should have the lowest fees, lowest interest rates and benefits that match your financial needs.
Understanding credit limit
Every credit card comes with a credit limit offered by the bank. Credit limit is essentially the maximum balance that the card-issuing bank gives you in a billing cycle. The whole idea behind setting a credit limit is to help maintain a good credit score.
While banks often decide your credit limit based on your income, loans you have and credit history, experts say that a credit limit should ideally be as much as your monthly income.
And how much you spend out of the credit limit you have, constitutes your credit utilisation ratio. The lower your credit utilisation ratio, the better it is for your credit score. If you have a high one, then your credit score gets reduced.
Parijat says that it is advisable to also use the credit card regularly but use only up to 30-40% of the credit limit.
For example, if your credit limit is Rs 50,000 a month, then it is advisable to spend around Rs 15,000-Rs 20,000 every billing cycle.
Interest rates
Every credit card has an interest rate charged on it. Interest is charged only when you do not pay the outstanding amount in full or when you withdraw cash from ATMs using your credit card.
Every month, your credit card-issuing bank sends you a statement of how much you spent and what the minimum amount due is.
If you clear your credit card dues in time, no interest is charged.
Experts says that the most common mistake people make is to pay only the minimum amount due and not the entire amount spent. However, despite what you pay, it is the entire outstanding credit card bill that will attract interest charges.
Say you spent Rs 10,000 in a month and the minimum amount due is Rs 2,000. Even if you pay only Rs 2,000, interest will still be charged on the remaining outstanding amount of Rs 8,000.
Timely repayment
If you do not even pay the minimum amount due, a late fee is levied, which reflects in your next bill.
According to Parijat, whatever you use, pay all dues on time and pay in full. “In case you have trouble paying out your full amount, ensure you pay at least the minimum amount due to minimise the charges. Explore converting any larger purchases into EMI as that will allow more comfort to repay and reduce overall interest burden on the credit. This discipline of use and timely repayment will help also drive the credit score up.”
However, if you only pay the minimum amount due, or pay back only a part of your credit card bill regularly, the bank issuing your card may reduce your credit limit, which eventually reduces your credit score.
You will also keep attracting an interest charge, while will lead you into a debt trap, leaving you with a massive bill to clear.
“The first credit card can be both exciting and daunting at the same time. And, it's easy to fall into a credit card debt if one is not careful. However, having the right credit card in the pocket is a wise move especially for working professionals,” Parijat says.