Credit cards are financial instruments that allow you to borrow money without interest for a stipulated time. They are quite popular especially owing to the convenience they offer in making payments. However, if used irresponsibly, they can cause a lot of financial stress.
It is important to know how credit cards work before you apply for one. Here are 10 things about credit cards you should know first.
It’s not free
Credit cards work as short-term loans which attract no interest, as long as the amount due is paid fully on time. Typically, this interest-free period is up to 50 days, which means you have 50 days starting from day one of your credit cycle to repay dues. If you miss the repayment deadline, you may be charged a late fee and/or interest on your outstanding bill amount.
Every credit card has a fixed usage limit, which is the maximum amount that can be charged to the credit card during one credit cycle. The credit limit offered can vary based on factors like the cardholder’s credit score, payment history, income, and credit utilisation ratio. For first-time users, this limit can serve as an effective barrier against overspending. If you use your credit cards wisely and settle your bill on time, your bank may offer to increase your credit limit.
Minimum amount due
At the end of your card’s interest-free period, you must pay either the total outstanding due or the minimum amount due (MAD). The minimum amount due is typically 5% of the outstanding bill amount. While paying the minimum amount due can keep the credit card active, interest will continue to accrue on the outstanding balance.
It is advisable to pay the total outstanding amount by the due date. If you are unable to do so, request your issuer to convert your outstanding balance into affordable equated monthly instalments (EMIs).
Credit card statement
Pay attention to your monthly credit card statement. It includes important usage-related details such as purchases, credit, minimum amount due, interest payable, late payment, and the payment due date. Going through these details can help you spot any transaction errors.
Understand your credit card’s billing cycle to keep track of due dates and avoid paying late fee or interest. For example, if your credit card statement is generated on the 2nd of every month, it means your credit cycle begins from 3rd of the previous month and ends on the 2nd of the current month. You will get 50 days from the start of your billing cycle to pay the amount due. If you miss the repayment deadline, you may be charged a late payment fee or interest on the total outstanding amount.
Rewards and cashback
Credit cards enrich your shopping experience with cashback offers and rewards. With regular use, you can earn reward points or avail discounts at selected retailers. Reward points can help you save on routine expenses like grocery shopping, travel, and dining. However, they come with an expiration date which will be mentioned in your bill statement. Analyse your expenses to choose a credit card that is aligned with your needs.
Cash withdrawal facility
Just like debit cards, you may also use your credit cards to withdraw cash from ATMs. However, cash transactions start accruing interest from the minute you withdraw, with rates as high as 3.5% per month. Considering this, it is advisable to assess your cash needs before making a withdrawal.
Annual fee waiver
Credit cards usually come with annual fee which may be waived if the cardholder spends a fixed amount using their credit card in a year. The amount may vary based on their credit limit.
Credit score building
Responsible credit card usage is an effective tool to build your credit score, which can affect loan applications you make in the future.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.timesnownews.com.)