When it comes to credit cards, the first thing you need to learn is ‘what to avoid’ instead of trying to figure out what is best for you. What most people don’t understand is the fact that credit card is just a payment mechanism first, and as an added benefit you get the facility to avail credit for a stipulated interest rate.
There are other benefits such as reward points, gifts, special offers/discounts, cash backs, travel miles, etc. But before we go in to the boring advice about what to avoid, we will see what makes a credit card attractive in general.
Which Card to Choose? – Factors to Consider
1. Interest Rates:
For the sake of simplicity let us discuss just the plain vanilla credit cards here. We will discuss specialized cards later. From a pure financial angle, a card that charges a minimum interest and provides generous credit limit for purchases or spending is the best for you. Interest rates range from 2.5%-4.0% per month roughly.
2. Credit Limit:
While credit limit is internally decided by the bank or card issuer and depends on your credit worthiness and its associated factors. So you have to just balance between interest rate and credit limit.
3. Annual Fee:
Additionally, you should also ensure that you pick cards that don’t have an annual fee. Generally most basic cards are free, but sometimes cards with special schemes or offers may have some fees, so try avoiding cards that charge annual maintenance fees, unless you are doubly sure that the value of the benefits will equal or exceed its costs.
4. Special Features or Offers without Annual fees
There are plenty of offers, discounts, co-branding, privileges, etc, that are provided by different cards. This makes the choice pretty difficult for people who are looking to benefit from them. Some of these cards have no annual fees, which still makes it worth trying, assuming all other features are pretty standard and good enough.
For example there is a card offered by a multinational bank, which is co-branded with Indian Oil Corporation (IOC) where reward points can fetch free petrol. This is a good deal because many people spend on petrol, and moreover the card has no annual fees.
5. Special Features with Annual fees
What about cards that come with special features like cash back, travel miles, etc with an annual fee? Yes it has some benefits, but not for all. For instance if you are a frequent flyer it makes sense to use a card which provides miles or points, which can be redeemed for discounts on air tickets or to avail free tickets. Similarly there are special offers with credit cards at swanky stores, parlors, gyms, restaurants, etc. These are also termed as “lifestyle offers” which mostly tempt you in to extra spending in the disguise of discounts or offers. Yes these are not bad or useless per se, but are useful for people who may benefit from such offers by virtue of being regular customers of lifestyle products/services. In India, generally speaking, the basic credit card facility can be availed without annual fees.
6. Favorable Terms
Reading the fine print is important when you get a credit card. Although not all terms are favorable you will be saved from a lot of trouble if you read the fine print well. For instance you need to be aware of terms relating to
- Delay in payment, penalties, grace period, etc. – If you choose a card that has a reasonable grace period for payment delays and reasonable penalties, you will be saved from huge losses in case of unavoidable defaults or delays.
- When you exceed your credit limit – some cards charge a higher interest rate or penalty or both if you exceed your credit limit. In few cases the cards were blocked when the customer crossed the credit limit. This can cause a lot of inconvenience when you have genuine emergencies or contingencies for a short period.
7. Introductory Offers
This is one major area of concern for many card users, who get a red carpet welcome when they sign up with low rates, zero fees and a host of other offers. But after one year, things turn sour and you have a lot of nasty surprises in terms of annual fees, higher rates, expiry of reward points, etc. These are cases where people have applied for a special card which has introductory offers valid for one year. This is quite common where people are miss-sold a card which has this offer that expires after a year.
In some cases the rate of interest would have been 2% per month during introductory period, but would have become 3.5% after introductory period. So for a person who has been rolling over his balance regularly its an additional burden of 1.5% per month or 18% per year.
So to sum up this topic I would say that it is always wise to know your card well before you become a member. If you have been unaware of certain features or terms, it is good to clarify with customer service and other sources too. In worst case if you have the wrong card and are not able to afford the charges and fees, you can minimize your usage, pay off the balance, and close the account (surrender your card), and apply for a new card.
The most important point to remember is the fact that you cannot make a good deal or killing by choosing the best credit card, because the credit card company/bank is also smart enough and has a few catches in place to protect their business and profits.
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