Know your Credit cards better
‘Never ever get a credit card, it’ll ruin your finances. I’ve seen many people going into debt traps because of Credit Cards’.
Most of us might have heard these from parents, seniors, family and friends when we are starting our first job. Everyone talks about how credit cards are bad when they are not used properly. However, that is only half true.
Credit cards are one of the best things in the world of finance, given that you use them properly.
So what are credit cards actually?
In simple words, credit cards are piece of rectangular plastics (in some case, metals :P) provided by finance companies, who lend you money up to a predefined limit and allow you to use that money purchases. The company will give you certain time to pay back the money without any extra charge. If you fail to pay on time, you will be charged an extra amount on that money.
Read the last line again, ‘If you fail to pay on time, you will be charged an extra amount on that money’. So, as long as you are paying the amount on time, you don’t have to worry about credit cards ‘Ruining your finances’.
In this post, I’ll explain you everything about credit cards, their benefits, how to get them, and how to use them for maximizing your benefits. I’ll also explain you how to select a credit card based on your needs and will provide suggestions for some of the best credit cards in industry based on needs like travel, shopping etc.
But before that, lets see some common terms used in credit cards:
- Joining Fees: Joining fees is the one time amount charged by the Credit card company to issue the card. It varies from card to card, company to company. Few companies issue some of their cards without charging a joining fees. However, most of the companies give joining benefits like shopping vouchers, flight tickets to compensate for the joining fees.
- Annual Fees: This is the recurring amount charged by the credit card company every year. You have to pay this amount irrespective of you are using the card or not. However, most of the companies in the market provide spend-based annual fees discount/waiver, which means that if you spend some amount using the card in an year, your annual fees will be discounted/completely waived off. Some companies even provide reward points to compensate for the annual fees.
- Credit Limit: This is the maximum outstanding credit you can keep on a card at any instant. This amount is predefined at the time of card issuance and is revised regularly based on your salary, spending patterns etc.
- Cash Limit: This is the maximum cash which you can withdraw using a credit card. This is included in the next statement and needs to be paid in full to avoid penalty. For nearly all the cards, cash withdrawal is chargeable.
- Billing cycle: This is the time interval between 2 consecutive bill generations. Generally, 1 billing cycle is 1 month.
- Grace period: A time period post the bill generation, in which you need to pay. The last day of grace period is the cutoff date for paying without penalties (also called as payment due date). This is generally 10-20 days post the bill generation date.
- Bill/Statement: A document which shows the credit/debit transactions details happened on your card in the last billing cycle. It also shows things like Total amount due, Minimum amount due and due date which I’ll explain next.
- Total amount due: This is the total amount charged to your card in the last billing cycle (including any pending dues from the previous bill) minus the total amount credited to the card during the last bill cycle.
- Minimum amount due: This is the minimum amount which you have to pay before the due date to avoid any late payment charges and negative impact on your credit score. However, if you pay the minimum due amount, you will be charged an interest rate on the remaining pending amount.
- Due date: The cut-off time before which you need to pay your bill to avoid any late payment charges.
- Late payment Fee: It is the penalty charged on your card if you miss paying the minimum amount due on your card by the due date.
- Interest rate: The compounded rate which is charged on the balance on your card if you don’t pay the bill amount in full. Generally it is in the range of 2%-3.5% per month.
- Credit Utilization Ratio: At any instance, credit utilization ratio is the total outstanding on the card, stated as a percentage of the credit limit.
- Balance Transfer: Balance transfer is the process of transferring the unused credit balance from one card to another. If you have multiple credit cards, you can transfer the unused credit balance from one card to another card if you want to decrease the outstanding of your second card. However, most of the companies have extra fees for balance transfer, accompanied by an interest rate.
- Currency conversion Fee/Foreign Transaction Fee: This is the fees charged by the company if you are using the card to pay for any other currency. It typically varies from 1.75%-4% of the amount.
- Expiry Date: The month and year post which your card will stop working. In most of the cases, the company automatically issues a new credit card and sends to your correspondence address registered with your card.
- CVV: It is a number printed on your card for verifying online transactions. For Visa/MasterCard/Rupay, it is the 3 digit number printed on the back of the card. For American Express, it is the 4 digit number printed on the front side of the card.
Okay, now that we know the common terminologies related to credit cards, lets see the pros and cons of using credit cards.
Cons first, since they are very less.
- Penalty/Interest Rate charged: If you don’t pay the total amount due on your card, you might end up paying interest rate/penalty on the pending amount of your card. This interest rates can be high, ranging from 2%-3.5% per month.
- Impact on credit score: If you don’t pay your minimum due amount by the due date, your credit score might be negatively impacted.
- Unrealized spending: Researches have shown that if we use paper money, we tend to spend less since we can ‘see’ the money going away from us. In the case of credit cards, we don’t actually see the money leaving our pockets/bank accounts. We realize it when we see the bill arrives, but by that time its already too late. This is not a con, more of a self control issue.
Thats it, I can see only these cons of using a credit card that I can think of. However, all of these cons of using credit cards come with an ‘if’ clause. If we take care of those ‘if’ conditions, we don’t need to worry about anything.
Let us see the list of pros
- Free Credit: You get interest free credit for up to 10-50 days on your purchases(30 days of bill generation and 10-20 days of grace period).
- Earn interest: You earn interest for 10-50 days if you keep money in your bank account and use credit cards for purchases.
- Reward points: You get reward points for your purchases. Depending on your card type, you can get reward points for your purchases.
- Other benefits: You get benefits like Travel insurance, airport lounge access.
- Credit Score: You can use credit card to raise your credit score if you pay all your total amount due before the due date.
- Acceptance: Most of the credit cards are internationally accepted. So, you don’t need to worry about foreign currency in case off emergency.
These are only some of the pros of credit cards. Apart from these, there are numerous other benefits like fraud protection, free flight upgrades, free spa, airline miles, free concierge services, free memberships etc.
So, we can clearly see that for credit cards, the pros outnumber the cons. Please checkout my blog below to know more about your credit cards and how to use them properly. You can also read my reviews on credit cards and decide for yourself whether you should get the credit card or not.