The 4 Ws of Credit Cards
It is fairly easy to procure a credit card and easier still to spend thereafter. Credit card usage has steadily been on the rise in India over the last few years. The lure of instant gratification, not having to postpone your purchase and the convenience associated with not having to carry cash have made these cards an almost must have for one and all. However, like any other product, credit cards too come with their own set of considerations that must be kept in mind to avoid financial loss or a spiraling debt trap.
What are Credit Cards?
Credit card is an instrument that provides you instant credit whenever you need, though there is a credit limit upto which you can make a purchase on your card, which depends upon the kind of card you own. The flexibility comes at a price though; you have to pay interest on the credit amount depending upon the number of days you take to repay the total outstanding amount. All banks provide you with an interest free period and no interest is charged if you repay your outstanding credit during this period. If you do not clear your dues during this period or pay only part of the due amount, you have to pay an interest on the outstanding amount on your card.
What kind of purchases should one make through credit cards?
Yes, it’s easy to purchase anything on credit these days but it is always better to save up for the purchase especially if you think you can’t clear up the dues before the interest cost kicks in. Credit cards should largely be used for convenience and not for debt. The interest rates on credit card dues can be as high as 3-3.5% a month – that is a high 36%-42% a year. The only purchases that one should ideally make using their cards should be ones that fall largely within one’s affordability limits – know your budget and do not spend large amounts if you cannot pay most if not all of it before the due date of an interest charge becoming applicable.
The flexibility of being able to pay later usually leads us to misuse our credit cards or even overspend. We do not give much importance to the fact that one must control their budget or at the end of the day, we are one who has to repay the amount and that too with an interest being charged. Running up a credit card debt is highly detrimental due to the high interest rates involved. In case of a continuing credit card debt, always endeavour to pay more than the minimum that is required so that you can recover from the debt faster than you would if you paid only the minimum amount.
What to look for when choosing a credit card?
Like in any other product or product category your choice should be driven by two factors – cost and benefits. Needless to say, the best card would be one with lowest cost for a given set of benefits. The costs associated with a credit card can be in the form of a joining fee, an annual recurring fee, the interest cost on outstanding dues, late payment fees etc. On the benefits side, there could be reward points, cash back offers, loyalty awards, discounts etc. Which card suits you best will also be determined by your card usage.
- Reward cards make most sense if they come with no or minimal joining or annual fees. If there is such a fees applicable on your card, then make sure you compare this amount with the potential savings you could make using the reward points or cash back offers since these are subject to a maximum limit or even restricted to purchases at certain outlets etc.
- If you usually carry outstanding balances on your card, choosing a card that offers you the lowest interest rate makes more sense than going for a higher interest rate reward/cash back card. Remember, rewards or cash back will never really be able to compensate you for the amount you will be paying at high interest rates on your outstanding balances.
- If choosing between reward card only, then one should compare not only the reward point accumulation structure but also the monetary value of a reward point. Different banks have different redemption value associated with points. While a bank might be offering a higher accumulation of points for a rupee amount spent, it might be redeeming those points at far lower rupee denomination.
- Other things to keep in mind for comparisons would be charges such as late payment fees and benefits like lost card liability insurance so that you are financially covered in the case of a lost card being misused.
What precautions should one take to protect against credit card fraud/misuse?
You should be careful of the various risk factors related to your credit card. When you use a credit card to make an online purchase, there are chances that you could suffer online fraud. There is also the risk of credit card loss or theft in which case your card could be misused. Simple precautions such as the following can really help you minimize these risks or the potential financial loss associated with such events:
- Always use a secure internet connection for you online credit card purchases. Do not use an public internet connection to make online transactions using your credit cards
- Make sure that your transactions are being carried out on a safe and secure website that uses encryption. Simple signs to check this are the website address starting with ‘https’ (s for secure) instead of the usual ‘http’ and the presence of a closed ‘lock’ besides the URL or at the right hand bottom of the screen.
- It always helps to use virtual keyboards when using your credit cards for online transactions.
- Regularly check balances on your cards to ascertain any irregular transactions. The earlier you catch any such activity, the higher are your chances to limit your financial loss.
- Protect you card from misuse by having a liability protection against loss or theft. There are even options such as credit protection plans that offer you a single point of contact to report and block multiple credit cards.