 "Credit cards: Keep tabs on your spending")
You have landed a well-paying job after your graduation and soon it is time to receive your first salary. Once the salary is credited into your account, you start receiving calls from the bank offering you a credit card.
So far you only had an add-on card that was linked to your parents' card and the spending was monitored and restricted by your parents. Here is a chance for you to have a card of your own. The offers on the cards, such as free movie tickets, discounts on electronic gadgets and for online shopping are also tempting. You waste no time in applying for one. And get one easily since you are now the bank's customer.
While banks are stricter now when it comes to issuing credit cards, they do give a preference to salaried people. More so, if they are the banks' own customers.
Youngsters who get credit cards should remember that a credit card is a key to fulfilment of desires, provided it is within your repaying capacity. This requires responsibility. Those who manage this fine balance of access and responsibility well make a good start to their financial life. And those who fail find themselves in a debt trap with low credit score. This is difficult to overcome if you go overboard.
If the credit card is your first exposure to credit, use it as tool to build a strong credit profile. Not going overboard with your credit card usage, not using the credit limit to the full, repaying on time and in full, not revolving the outstanding amount will ensure you a high credit score.
Sticking to budget
Since you are a first-time card holder, it is likely that the bank will not give you a credit card with a very high credit limit. This will automatically ensure that you do not overspend. In addition to this, you can set a target for yourself. If your credit limit is Rs 30,000, tell yourself that you will not spend more than Rs 10,000 in a month. This not only ensures that you stay much below your credit limit, but also keeps your credit utilisation ratio at a healthy 30 per cent. If you manage to keep your credit utilisation ratio low, you will also be rewarded with high credit score.
In fact, if you are careful with your credit limit, the bank may offer you an upgrade on your card by increasing the credit limit, which will also improve your credit profile. But use the enhanced limit only in case of an emergency.
Pay in full
Though you may decide to keep your expenses low and at a manageable level, there will be occasions when you may get tempted to avail credit beyond the due date. But never do that. Always make full payment. If you decide to make part payment or choose to pay minimum balance due you are inviting funding charges on the entire amount outstanding at a steep rate of interest. This rate of interest is as high as 3 per cent per month, which by way of compounding reaches to 42.5 per cent for a year. In addition to interest payable, you may have to pay late payments fee, if applicable. This will push up the bill for the following month. Also, rollover of credit on cards impacts your credit score adversely.
One way to ensure that you pay on time and in full is to deposit the cheque with the card issuing bank at least three business days prior to the due date. Or a simple standing instruction on your saving bank account can help you pay your entire outstanding credit card bill on due date without fail. However, for this, you need to ensure sufficient balance in your saving bank account.
'No' to cash
There is one mistake some new credit card holders commit - withdrawing cash on their credit card. A cash withdrawal, technically called cash advance, has two cost components attached to it. First, there is a charge to the tune of 1.75 per cent of the cash availed. And second, the interest starts from the day you availed the cash and not from the bill due date cycle. Never withdraw money on your credit card, use debit card instead. Taking cash on credit card should be the last resort.
Secured credit cards
If you can't control your spending, opt for credit cards that are issued against a bank fixed deposit. Some banks offer these cards. The bank asks for a fixed deposit from you. If you make a fixed deposit of Rs 1 lakh the bank will issue you a credit card with a limit of say 60 to 70 per cent of this fixed deposit amount. So you get a credit card with a limit of Rs 60,000-70,000, depending upon the bank's rules.
Since the credit card has got an asset the fixed deposit to back it, it is known as 'secured credit card'. The credit card holder can use this credit card like any other card. The rate of interest on these cards is lower than the other unsecured credit cards. However, on all other parameters the secured credit cards are as good as other unsecured credit cards.
Since banks increasingly rely on data from credit bureaus to determine if a borrower is credit worthy or not, a good credit score will help you in the future.
You may want to take a two-wheeler loan or a car loan after a couple of years and a home loan after five to six years. A good repayment trackrecord on your credit card, can help in getting a loan easily. It may even get you loans at cheaper rates.
Know the rules
Credit card issuer banks share important rules that govern the credit card usage with their customers in an easy to understand format. Preserve that piece of paper. If you have misplaced these rules, ask your bank to send you one. If you do not understand any rule or confused about something pertaining to your credit card, do call up your bank and get it clarified. Never assume things, as in most cases, it may hamper your finances. If you know how the credit card functions, you can use it to your advantage and keep your credit profile healthy, keeping your credit score high.
Safety precautions
Some safety precautions that you must keep in mind include not sharing your credit card details and CVV numbers with others and never hand over your credit card to others. You should transact only on secured web site and the correct method of payment is one that insists on two step authentication by using one time password sent by the card issuer bank.
Banks nowadays have introduced systems to authenticate unusual transactions. For example, if a transaction of a far higher value is going through on your credit card, the bank will call you on your cell number. It is a real time authentication by a banking officer, who requests your identification details on phone to verify if the card is used by cardholder himself. This helps to avoid fraudulent transactions. For this to be successful there are two requirements - first your cell number must be registered with the bank and second you should answer a call from the bank.
Some banks do share the phone number from which they make such calls with their cardholders. If your bank has shared such a number with you, do save it in your phone as important cell number and answer a call from that number even if you are in an important meeting.
Use credit cards judiciously, to enjoy the benefits they offer.
So far you only had an add-on card that was linked to your parents' card and the spending was monitored and restricted by your parents. Here is a chance for you to have a card of your own. The offers on the cards, such as free movie tickets, discounts on electronic gadgets and for online shopping are also tempting. You waste no time in applying for one. And get one easily since you are now the bank's customer.
While banks are stricter now when it comes to issuing credit cards, they do give a preference to salaried people. More so, if they are the banks' own customers.
Youngsters who get credit cards should remember that a credit card is a key to fulfilment of desires, provided it is within your repaying capacity. This requires responsibility. Those who manage this fine balance of access and responsibility well make a good start to their financial life. And those who fail find themselves in a debt trap with low credit score. This is difficult to overcome if you go overboard.
If the credit card is your first exposure to credit, use it as tool to build a strong credit profile. Not going overboard with your credit card usage, not using the credit limit to the full, repaying on time and in full, not revolving the outstanding amount will ensure you a high credit score.
Sticking to budget
Since you are a first-time card holder, it is likely that the bank will not give you a credit card with a very high credit limit. This will automatically ensure that you do not overspend. In addition to this, you can set a target for yourself. If your credit limit is Rs 30,000, tell yourself that you will not spend more than Rs 10,000 in a month. This not only ensures that you stay much below your credit limit, but also keeps your credit utilisation ratio at a healthy 30 per cent. If you manage to keep your credit utilisation ratio low, you will also be rewarded with high credit score.
In fact, if you are careful with your credit limit, the bank may offer you an upgrade on your card by increasing the credit limit, which will also improve your credit profile. But use the enhanced limit only in case of an emergency.
Pay in full
Though you may decide to keep your expenses low and at a manageable level, there will be occasions when you may get tempted to avail credit beyond the due date. But never do that. Always make full payment. If you decide to make part payment or choose to pay minimum balance due you are inviting funding charges on the entire amount outstanding at a steep rate of interest. This rate of interest is as high as 3 per cent per month, which by way of compounding reaches to 42.5 per cent for a year. In addition to interest payable, you may have to pay late payments fee, if applicable. This will push up the bill for the following month. Also, rollover of credit on cards impacts your credit score adversely.
One way to ensure that you pay on time and in full is to deposit the cheque with the card issuing bank at least three business days prior to the due date. Or a simple standing instruction on your saving bank account can help you pay your entire outstanding credit card bill on due date without fail. However, for this, you need to ensure sufficient balance in your saving bank account.
'No' to cash
There is one mistake some new credit card holders commit - withdrawing cash on their credit card. A cash withdrawal, technically called cash advance, has two cost components attached to it. First, there is a charge to the tune of 1.75 per cent of the cash availed. And second, the interest starts from the day you availed the cash and not from the bill due date cycle. Never withdraw money on your credit card, use debit card instead. Taking cash on credit card should be the last resort.
Secured credit cards
If you can't control your spending, opt for credit cards that are issued against a bank fixed deposit. Some banks offer these cards. The bank asks for a fixed deposit from you. If you make a fixed deposit of Rs 1 lakh the bank will issue you a credit card with a limit of say 60 to 70 per cent of this fixed deposit amount. So you get a credit card with a limit of Rs 60,000-70,000, depending upon the bank's rules.
Since the credit card has got an asset the fixed deposit to back it, it is known as 'secured credit card'. The credit card holder can use this credit card like any other card. The rate of interest on these cards is lower than the other unsecured credit cards. However, on all other parameters the secured credit cards are as good as other unsecured credit cards.
Since banks increasingly rely on data from credit bureaus to determine if a borrower is credit worthy or not, a good credit score will help you in the future.
You may want to take a two-wheeler loan or a car loan after a couple of years and a home loan after five to six years. A good repayment trackrecord on your credit card, can help in getting a loan easily. It may even get you loans at cheaper rates.
Know the rules
Credit card issuer banks share important rules that govern the credit card usage with their customers in an easy to understand format. Preserve that piece of paper. If you have misplaced these rules, ask your bank to send you one. If you do not understand any rule or confused about something pertaining to your credit card, do call up your bank and get it clarified. Never assume things, as in most cases, it may hamper your finances. If you know how the credit card functions, you can use it to your advantage and keep your credit profile healthy, keeping your credit score high.
Safety precautions
Some safety precautions that you must keep in mind include not sharing your credit card details and CVV numbers with others and never hand over your credit card to others. You should transact only on secured web site and the correct method of payment is one that insists on two step authentication by using one time password sent by the card issuer bank.
Banks nowadays have introduced systems to authenticate unusual transactions. For example, if a transaction of a far higher value is going through on your credit card, the bank will call you on your cell number. It is a real time authentication by a banking officer, who requests your identification details on phone to verify if the card is used by cardholder himself. This helps to avoid fraudulent transactions. For this to be successful there are two requirements - first your cell number must be registered with the bank and second you should answer a call from the bank.
Some banks do share the phone number from which they make such calls with their cardholders. If your bank has shared such a number with you, do save it in your phone as important cell number and answer a call from that number even if you are in an important meeting.
Use credit cards judiciously, to enjoy the benefits they offer.
The author is Director and Co-Founder, www.creditvidya.com