It is obvious to get confused while looking for a credit card, especially if you have never used one before. There are multiple credit card options to choose from so it becomes important to start from the basics. To make your decision faster, you can start by asking yourself why you need a credit card, whether it is to gain rewards, build credit or make a big purchase. Once you know your goals, you can narrow down the credit cards according to their features and the benefits that they offer.
Credit cards are not just a payment tool, if used smartly, you can benefit a lot from them. Some cards offer reward points on purchases while others offer cash back. But often there are certain fees associated with credit cards as well. When evaluating credit cards, ensure to compare the fees against the rewards that the credit card offers. If you end up paying more fees than the rewards that you get through the card, it is probably not worth having it.
Things You Must Look For
Apart from all the factors mentioned above, look for other discounts and benefits such as complimentary airport lounge access and a fuel surcharge waiver. There are many features to look at while applying for a credit card, and here are a few to keep in mind.
One of the most important factors to be checked while applying for a credit card is its interest rate. You might plan to pay off your complete balance before the due date and assume that you would never have to pay the interest. It is still essential to be considered because we are humans and we tend to make mistakes. You might forget to pay off one of your bills on time or if you have recently made a big purchase, there are chances that you won’t be able to pay off the balance at once. Hence, if you are just starting with your financial journey, it is best to stick to a credit card with a low or average interest rate.
If you are applying for one of your first credit cards, it’s beneficial to look for low-interest credit cards. Usually, 1.5-2.99% per month is considered the low-interest range. These cards can be quite beneficial as they offer the customer saving opportunities. Generally, low-interest credit cards are premium cards that come with a high annual fee, but there are a few exceptions such as the IDFC First Select Credit Card which is a lifetime free credit card with low interest.
People who own high-interest credit cards are more cautious when it comes to paying their bills and do so promptly. So if you have a high credit score, you can check with your bank if you are eligible to apply for that highly-rewarding low-interest credit card that you have been eyeing for a while.
Fees and other charges
Credit cards when used properly can be highly rewarding for you, but most credit cards come with numerous fees associated with them. It’s important to be aware of the penalties and other charges of a credit card to minimize incurring additional charges.
- Annual Fee – Annual fee is the yearly cost that the credit card issuer charges on your credit card to keep your account open. Since the cost of owning a credit card is higher when the card charges an annual fee, the rewards that you get from the credit card must exceed that cost so that you don’t end up losing money.
- Cash Advance Fee – A cash advance fee is charged when you withdraw cash from the ATM using your credit card. For example, HDFC Bank charges a cash withdrawal fee of 2.5%-3% of the total transaction amount, and it is reflected in the billing statement.
- Late Payment Fee – Late fee is charged when you aren’t able to pay your bill before the due date. This fee is reflected in the next credit card bill. According to the Reserve Bank of India, banks can only charge late fees if the payment is due for more than three days and you can avoid it just paying the minimum due amount.
- Forex Markup Fee – Foreign currency transaction fees are charged by the credit card issuer if the user makes a transaction in a different currency. Usually, banks in India charge 2% to 4% but it varies across banks.
- Returned Payment Fee – Credit card companies charge return payment fees when you either don’t have enough funds or if your account can’t process the transaction due to some reason.
- Over Limit Fee – Over limit fee is charged when you exceed the credit limit. The fee is imposed on the outstanding amount which exceeds the credit limit.
Usually, credit card issuers offer a relatively lower credit limit to first-time users. It is because they don’t know how responsible or risky the user is. And if one keeps using his credit card responsibly, the card issuer increases the credit limit with time. Nevertheless, your credit limit should align with the cost of purchases that you intend to make with your credit card. The Credit Limits of credit cardholders also affect their credit utilization ratio. If your credit limit is too low relative to your expenses, your credit utilization ratio will exceed the ideal 30% and might cause your credit score to drop. Hence, it is essential to ask the card issuer for the credit limit that you will be offered with a particular card.
Credit cards nowadays offer a wide range of rewards and benefits to the cardholders. These benefits may vary for different cards and include exciting features like cashback, discounts, and other special offers. When applying for a new credit card, see if the rewards that are being offered align with your purchasing habits. For example, if you travel often, getting a card that rewards the most on travel would be beneficial for you. Although these programs offer incentives to make people sign up, it is important to go through all the terms and conditions to understand what works best for you. Following are some of the common rewards programs that are offered by different card issuers:
- Cashback – Cashback is a direct way to reward the cardholder based on their spending, the more the user spends, the more cashback they receive. Cashback is often offered as a percentage of the total transaction amount. Many people tend to overspend in order to earn more and more cash back, but that is not a good idea at all. When you redeem this cashback, it is directly credited to your account and can be adjusted against your outstanding balance. For example, the HDFC MoneyBack Credit Card offers 2 reward points on every Rs. 150 spent and 100 reward points would give you a cashback of Rs. 30.
- Reward Points – It is another type of reward program that credit card issuers offer. Under this program, cardholders earn reward points on almost every purchase they make, and these points can be redeemed against various options, like shopping gift vouchers, travel bookings, and many more. Some card issuers also provide the option of redeeming your reward points against cashback that is directly credited to your account. For example, the SBI SimplyCLICK credit card is one of the best credit cards to avail reward points on online shopping via popular sites such as Amazon, BookMyShow, Lenskart, etc, users get 10X reward points when shopping through these sites. Moreover, the monetary value of 1 Reward Point here is Re. 0.25.
- Miles – This reward program is ideal for individuals who travel often. With such credit cards, you earn air miles on all your spends, and these miles are redeemable against various travel-related options. Some card issuers even provide you with the option to redeem your earned miles against cashback, but it is always better to use these miles for travel bookings.
Reward programs can also be divided based on lifestyle types such as Travel Rewards Credit Card, Dining and Shopping Rewards Credit Card, and Entertainment Rewards Credit Card, according to the number of rewards they offer in a particular category.
Sign up for Bonuses and Other Benefits
Many credit cards offer amazing welcome bonuses to new cardholders. Sign-up bonuses help banks in acquiring new customers as they encourage people to open a credit card account and start spending through it. For example, SimplySAVE SBI Card in which you earn 2000 reward points if you spend Rs. 2000 within 60 days of card issuance, and the HDFC Doctor’s Superia Credit Card gives a welcome bonus of 1000 reward points.
However, choosing a credit card only on the basis of one factor is never a good idea, but you should look at all the above-mentioned things in order to make a wise decision.
The Bottom Line
With hundreds of credit cards available in the marketplace, it’s essential to filter out the ones that suit you the best. You can do this by deciding your expenditure goals or how much you intend to spend in the month. Also, you can explore reward programs that match your lifestyle habits. If it’s your first time, it might be a bit tricky to find the ideal card for yourself, but it is advised to understand your spending habits first.
Also, applying for too many cards or regularly switching cards is not a good idea since this can lower your credit score. So if you already have applied for a card, you should ideally wait for 6-9 months before you apply for the next one. You can apply credit card online to compare different cards and find the one that would be best for you.