Credit cards are fun. After opening a bank account, getting a credit card is the next financial ritual people go through with. Many people look forward to getting their first credit card, because it is a very big step. A lot of people are lured by the attractive cash back offers and bonuses that credit card companies offer.
However, it is important to realize that a credit card is not your money. It is money you have to repay to the issuing credit card company. While credits greatly help you to manage your cash flow, being unaware of the long term consequences can easily drown you in credit card debt. And most first time credit card users often overlook the negative effects of spending someone else’s money. If you are a first time credit card user, here are 10 tips to avoid falling into the debt track and maintaining a good credit score.
- Choose your credit card carefully:
Every credit card is different. Every company has different agreements with different companies, which results in different offers and bonuses depending on the agreement. So before you choose a credit card, first understand your usage behavior. For example, if you are a frequent Amazon shopper, there is no reason for you to take a credit card that offers cashback on select store outlets. Similarly, if you fly international, choose a card that offers more points or miles on international flights instead of domestic flights. Also, if you know your monthly spending is going to be high, you may want to choose a card that offers a low rate of interest.
- Only buy what you can avoid:
This may seem fairly obvious, but it hard to implement in real life. Credit card users use credit money to supplement their cash inflow and manage cash flow, so it not uncommon for new users to spend on something they would normally not be able to afford. For example, if a person would normally spend INR1000 on shoes, after buying a credit card they may take the liberty to spend Rs4000, since the credit card limit allows it. Credit cards are great for instant gratification, but you give in to a lot of temptations you would normally not give in to. This is why using a credit card requires a lot of self control.
- Pay off your entire bill without any delay:
If you only buy what you can afford, then you will have no problem paying off the full credit card bill without delay every month. If even a single payment gets delayed, certain credit card companies instantly hike the interest rate, which can go as high as 25%. This interest rate is called penalty APR, which is something to look out for when you are looking for credit card options. A late fee can also be levied, not to mention your credit score is negatively affected by every late payment.
- Debt is dangerous:
The longer you let debt accumulate, the higher the debt amount will get over time. At a rate of 20%, interest of INR50000 becomes INR60000 in one year, and if you leave it longer, it becomes INR72000. Credit cards are a great investment for your investor. The rate of interest that is levied on you is not too much of a burden in the beginning, but unpaid debt can quickly become disastrous.
- Avoid cash advances:
The rate of interest levied on cash advances is higher than your regular APR (annual percentage rate). In addition to that, you need to pay a charge for the cash advance. Moreover, if you use your credit card at an ATM to withdraw cash, there is the ATM fee to pay as well. Either way, cash advances are never a good idea. Always use your own savings or money for cash purposes, and use the credit card for other purchases.
- Don’t make minimum payments:
Minimum monthly payment is an option offered to all credit card holders. This means the entire bill amount doesn’t need to be paid in one go and can be paid in parts. However, no matter what anyone tells you this is beneficial only for the issuer. For example, if your entire credit card bill amount is Rs. 1,50,000, with APR 20% and minimum payment is 3%. In the beginning you pay Rs. 4,500. This may not seem like much, but if you leave it the interest keeps growing. If you only make the minimum payment of 3%, it will take you more than 25 years to pay off the entire amount, which will exceed Rs. 3,30,000.
- Be aware:
The T&C’s of your credit card are subject to change, which is mentioned in the fine print. Pay attention to everything your credit card company sends you, and don’t ignore the new credit agreements. Issuers provide notice when they plan to add annual fees or increase existing fees. If you don’t want a bad surprise at the end of the term when the credit card statement is sent to you, don’t let the small details slip by.
- Check your credit score frequently:
Having a good credit score is very important. It can get you lower rates of interest on loans at later stages in your life. To keep your credit score high, pay your bills on time, and don’t max out your credit card limit. You should ask for a copy of your credit report once a year. Your credit report won’t include your credit score, but it offers details on your repayment history, current credit accounts, and your debt history.
- An increased credit limit is not a big deal:
It is advised to limit your usage to 40-50% of your credit card spending limit. However, after responsible behavior, the issuer gives you a higher limit. However, this does not increase your income, so any credit you rack up will continue to affect you in the same way. Also, at a limit of Rs.1,00,000 if you cap expenses at Rs. 45,000, a limit increase to Rs. 1,50,000 will mean your expense limit can also increase. However this is something you should consider only if your income has increased at a similar rate.
- Don’t share your credit card information:
This is a no-brainer. Credit card information is extremely private information, and no genuine company or person will ask for it by email or online or through a call. Never give out your credit card information except if it is for a specific purpose, and even then, keep your account number private.