The excitement of becoming an adult with new freedom cannot be denied but along with it comes some fair share of responsibilities as well. As you start growing up, you realize the need to have funds in hand to fulfill your financial requirement. This is when you start thinking about owning a credit card. Getting a credit card can be a daunting task as there are plenty of credit cards available in the market offering different features and benefits to the customers. A prospective applicant may get confused by looking at all such credit cards and struggles to choose one. Apart from the features and benefits, there are several other things that an applicant should be aware of before getting a credit card.
Getting a credit card is considered as achieving a milestone in an individual’s life. You must have a rough idea of how a credit card works but it is altogether a different experience when you actually own one. Credit cards are one of the most powerful financial tools that will help you in maintaining and building credit but can also affect your credit score adversely if not used in a proper way. Hence, the following are the factors that an individual should be aware of before getting a credit card.
Factors to Consider Before Getting a Credit Card
The following are some of the most important factors that you must consider before getting a credit card:
Your annual income
Annual income is one of the most important factors that should be considered before applying for a credit card. This is because a credit card issuer company will issue you a credit card only on the basis of your repaying capacity which will be well determined through your annual income. This will be proof that the lender that the borrower will be able to repay the bills owning to a credit card. Also, the higher the income, the premium the credit card will be.
There are plenty of credit cards available in the market. The applicant will have to choose a credit card not just on the basis of rewards and benefits but also on the basis of his spending pattern. If you are a new entrant in the field of credit cards, you should opt for a card that falls within your income bracket and also charges a low joining and renewal fee. Also, if you are someone who wants to apply for another credit card, you should well analyze your spending pattern and then apply for a new credit card. For example – if you are a frequent traveler, you should opt for a travel credit card or a shopping credit card if you spend a considerable amount of your earnings on shopping, etc.
Terms and Conditions related to a credit card
Another crucial factor that a prospective credit cardholder should be aware of is the terms and conditions. Though the basic terms and conditions of all the credit card issuers remain the same it is important to have in-depth knowledge of the terms and conditions of your respective credit card issuer which includes the credit card’s Annual Percentage Rate (APR), how rewards work and their redemption process, etc.
Suggested Post: Credit Card Annual Percentage Rate (APR) Explained
Fees and charges on a credit card
These fees and charges are different from bank to bank and card to card. Hence, before applying for a credit card, the applicant must read all the fees and charges related to a credit card including its joining and renewal fees, interest rate, cash-advance charges, financing charges, etc. It is important to know about such charges so that in the future if any of such fee is charged to your credit card statement, it does not come as a shock to you, and also you will have a fair idea that whether you will be able to accommodate these expenses in your budget or not.
Monthly interest rates
This interest rate will be applicable only if the cardholder is not able to make the payment of his credit card bills by the due date. If the cardholder is able to repay the bills within the due dates, he is clearly using the bank’s money for free but if unable to make payment within the stipulated time, this interest will be applicable on the amount due and you will have to pay the unpaid amount plus the interest portion on it and if you have made any purchases using the credit card in the next billing cycle by the next due date. This will be different for different banks and credit cards and will be charged in accordance with your respective card’s Annual Percentage Rate (APR).
Late Payment charges
These are the charges that will be applicable if you do not pay the bill amount by the due date. In case you pay the bill due on your credit card later than the due date, you not only incur interest charges but also late payment charges as well. And on top of it, this delay will be informed to the credit bureaus and hence will affect your credit score adversely.
Utilization of Interest-Free Period
As a new entrant in the field of credit cards, a cardholder should be well aware of the Interest-free periods and how to make proper utilization of this period. The interest-free period is the time when the credit card issuing company does not charge any type of interest on the amount that you have used through the credit card. It is the time between the start of the new billing cycle and the payment due date. If you have made any purchase within this period and are able to successfully pay off the amount by the due date, you will not be charged with any interest but if you are unable to pay the amount by the due date, you will have to late payment charges plus the interest charges on the unpaid amount.
Understanding of how credit cards can affect the CIBIL Score
Credit cards are such influential financial tools that can make and destroy an individual’s credit score. Any delay in the payment of credit card bills or spending beyond the limit of the credit card can affect your credit score in a very bad way. On the other hand, if you stay within the credit limit and pay your credit card bills on time, your CIBIL score will improve over the period of time.
Maintaining the credit utilization ratio
It is a crucial factor that needs to cross checked time and again. Getting a credit card does not mean that you can spend blindly using your credit card. A credit utilization ratio of 30% is considered to be an ideal ratio, which means the applicant should consume only 30% of the credit limit of the credit card. Going beyond this ratio will depict your overdependence on credit and hence will impact your credit score.
Getting the first credit card is considered as reaching a milestone in an individual’s life but on the other hand, a credit card is not easy to maintain. An applicant should be well aware of the factors mentioned above once before he initiates a credit card application. If an applicant has a clear knowledge of the factors mentioned above, he will be able to make better utilization of his credit cards and hence it will help the applicant build and maintain his credit score. But if he is unaware of the terms and conditions, fees and charges, etc that correspond to a credit card, he might unnecessarily use his credit card and will have to deal with various unwanted charges that will create a big hole in his pocket and have an unfavorable impact on his credit score.