[In-depth] 10 important things to know before getting a credit card
Credit cards are financial instruments that allow you to borrow money without interest for a fixed period. They are very popular especially because of the convenience they offer for making payments. However, if used irresponsibly, they can cause a lot of financial stress.
It is important to know how credit cards work before applying. Here are 10 things about credit cards you should know first.
It’s not free
Credit cards work like short-term loans that pay no interest, as long as the amount owed is fully paid on time. Typically, this interest-free period can be up to 50 days, which means you have 50 days from the first day of your credit cycle to repay the dues. If you miss the refund deadline, you may be charged late fees and/or interest on your unpaid invoice amount.
Every credit card has a fixed usage limit, which is the maximum amount that can be charged to the credit card during a credit cycle. The credit limit offered may vary depending on factors such as the cardholder’s credit score, payment history, income and credit utilization rate. For new users, this limit can be an effective barrier against overspending. If you use your credit cards wisely and pay 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 amount or the minimum amount due (MAD). The minimum amount due is usually 5% of the unpaid invoice amount. Although paying the minimum amount due may keep the credit card active, interest will continue to accrue on the outstanding balance.
It is advisable to pay the total amount remaining due on the due date. If you’re unable to do so, ask your issuer to convert your outstanding balance into affordable equivalent monthly installments (EMIs).
Credit card statement
Pay attention to your monthly credit card statement. It includes important usage details such as purchases, credit, minimum amount due, interest payable, late payments and payment due date. Reviewing these details can help you spot transaction errors.
Understand your credit card billing cycle to track due dates and avoid paying late fees or interest. For example, if your credit card statement is generated on the 2nd of every month, that means your credit cycle begins on the 3rd of the previous month and ends on the 2nd of the current month. You will have 50 days from the start of your billing cycle to pay the amount due. If you miss the repayment deadline, you may be charged late fees 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 rewards points or qualify for discounts at select retailers. Rewards points can help you save on everyday expenses like groceries, travel and meals. However, they have an expiry date which will be mentioned on your invoice statement. Analyze your expenses to choose a credit card that suits your needs.
Cash withdrawal facility
Just like debit cards, you can also use your credit cards to withdraw cash from ATMs. However, cash transactions start earning interest from the minute you withdraw, with rates as high as 3.5% per month. Considering this, it is advisable to assess your cash requirements before making a withdrawal.
Annual Fee Waiver
Credit cards usually come with an annual fee that can be waived if the cardholder spends a fixed amount with their credit card over the course of a year. The amount may vary depending on their credit limit.
Establish a credit rating
Responsible credit card use is an effective tool for building your credit score, which can affect any loan applications you make in the future.
(Disclaimer: The opinions expressed in this column are those of the author. The facts and opinions expressed herein do not reflect the views of www.timesnownews.com.)