In today's world of 'cashless' payments and plastic money, it is extremely important to choose the right card to swipe. Having the right card from the right service provider not only saves you the inconvenience of owning something you find little use for, but also benefits you financially by reducing costs.
Unlike debit cards, credit cards are accompanied by fees (mainly charged annually) as they provide specialised services. Also, credit cards have a minimum payment that must be paid by a certain due date to avoid late-payment penalties.
So, how do you go about choosing credit cards? Sure, you receive credit card offers from tele-callers or in your mail. Simply applying for the first one you open or the one that's most aesthetically appealing isn't the best way to choose. You must note that different providers charge different rates of interest for different services and plans. This is important, especially, if you want to maintain multiple credit cards or use your card for multiple purposes. You must also be mindful of the order of the payments you make towards clearing your debts or your payment hierarchy.
At MoneyRaksha, we introduce you to the different types of credit cards and understand your needs, so that you apply for the right card.
Credit card uses
You can use a credit card to:
- Make purchases;
- Withdraw money from a cash machine;
- Transfer balance or an outstanding debt from another card.
Why do you need a credit card?
Before you select a credit card, you have to precisely identify the reason why you need one. The reasons could vary; you could need a credit card:
- Because you have a balance that you need to pay off. A credit card with a low introductory interest rate and with no annual fee is your best bet. However, these cards come with steep penalty charges.
- Because you never carry forward a balance and pay your bills on time. Opt for a card that has a substantial grace period, offers rewards, and comes with minimal annual fees. However, you need to watch out for minimum-spend criteria, usage fees, and expiry dates in case of bonus points.
- Because you occasionally carry a balance, and like to distribute your spending across several cards and cash. What you need is a card that helps you organise your expenditure and gives payback offers. But remember, too much credit could land you in trouble!
- Because you have little or no credit history or you don't qualify for any credit cards. In such a scenario, you should get a 'secured' credit card, which requires a security deposit as collateral. Secured credit cards are accompanied by an annual fee and a minimum deposit to set up an account. Look for as reasonable a term as you can get . Since the rates may be high, it is advisable that you don't carry a balance.
Types of cards
There are several types of cards available in the market. These can be broadly categorised as:
- Standard credit cards. This type of card allows you to have a revolving balance, up to a certain credit limit. Charges apply for outstanding balances at the end of the month.
- Premium credit cards. These cards have higher fees, are available to a minimum income bracket, track credit score requirements, and offer additional incentives and benefits when compared to a regular credit card. You also receive cash back offers, reward points, travel upgrades, etc.
- Student credit cards. These are zero per cent interest cards.
- Charge cards. Charge cards do not have a credit limit and it is mandatory for you to pay off the balance in full at the end of each month. These do not have a finance charge or minimum payment. However, late payments could be subject to a fee, charge restrictions, or card cancellation.
- Limited purpose cards. Limited purpose credit cards can only be used at specific locations. These cards are used like credit cards with a minimum payment and finance charge. Store credit cards and petrol credit cards are examples of limited purpose credit cards.
- Secured credit cards. Secured credit cards are for those without a credit history or those with blemished credit, and therefore mandate a security deposit. The credit limit is equal to the amount of the deposit made. Secured credit cards have revolving balances depending on the purchases and payments made.
- Prepaid credit cards. As the name suggests, prepaid credit cards require that you load money onto the card before the card is used. These cards do not have finance charges or minimum payments since the balance is withdrawn from the deposit. Prepaid cards are similar to debit cards, but are not tied to a checking account.
- Business credit cards. These allow business owners to keep business and personal transactions separate.
Fees and charges
While applying for a credit card, you need to be aware of the fees and charges associated with it. Here's what you need to understand and look-out for:
- An application fee;
- An annual fee, membership fee, or participation fee (either annually or monthly);
- A set-up fee for opening a new credit card account;
- A cash advance fee, when you use your credit card to get cash;
- A balance-transfer fee, when you transfer a balance from one credit card to another;
- A late-payment fee, if your payment is received after the due date;
- An over-the-limit fee, if you make a purchase that takes your balance over your credit limit;
- A credit-limit-increase fee, if you ask for and receive an increase in your credit limit.
Eligibility, documentation, and verification
Banks outline certain criteria to make sure that you are eligible for a credit card. You need:
- To be between 18-70 years of age to apply for a card;
- A permanent and current address proof;
- A contact number, either a land line or a mobile phone number;
- A proof/ letter from the workplace to validated your ground further;
- An income proof;
- PAN card or other ID proof.
- When paying off a debt, it is essential to pay more than merely the minimum. Failing this, you could take years to clear a small debt.
- It is always a good idea to pay by direct debit. This ensures that you will always pay on time and avoid incurring late payment fees.
- As much as possible, resist using your credit card to withdraw cash from an ATM. Cash withdrawals generally come with a higher rate of interest than purchases, and are also accompanied by a withdrawal fee.
- Monitor your spending, and make sure you remain within the bounds of your agreed credit limit.