Credit card debts attract high interest rates, which may be as much as 40% annually on your unpaid amount. This is supplemented by late fees, collection charges, or even legal fees.
A credit card is not a free pass. You have to be able to repay what you spend using it. If you go overboard, you will end up being unable to repay what you owe.
C.S.Sudheer, CEO and Founder of IndianMoney.com said before availing a credit card, ask yourself why you need one. “Do you want the credit card as a backup for financial emergencies? This is definitely a wrong reason to avail credit cards. Create an emergency fund by putting money aside in FDs or liquid mutual fund schemes and use this money, instead of the credit card,” he said.
Thus, it is also important to understand why you should opt for a credit card and are your reasons justifying the need for that card. Here are a few questions that you need to ask yourself before availing a credit card:
Do you have the capacity to repay the billing amount?
You have the option of making a “minimum payment”— typically, 5% of the outstanding card balance to avoid paying penalties, but you still need to pay interest. Credit card debts attract among the highest interest rates, and you may have to pay as much as 40% interest annually on your unpaid amount. This is supplemented by late fees, collection charges, or even legal fees. Repeatedly making only minimum payments would keep you in debt for a long time.
Navin Chandani, CBDO, BankBazaar .com said if you don’t manage your debts well, you will get into debt traps – ever-deepening debt is hard to get out of. If you default on your payments and apply for more credit, your credit score will take a beating. “You will come across as credit-hungry and would be either denied further credit or be able to avail them at only very high costs. This will push you further into debt,” he added.
Also Read: 5 reasons why you should use a credit card
Does your credit card offer easy EMI option?
Even if you can pay a lump sum and buy a costly item, opt for interest free easy EMIs. The credit card must offer this facility, and it is very useful if you make regular multiple costly purchases. This reduces a strain on finances and you can invest money for higher returns.
Are dates flexible to pay bills easily?
Most financial institutions selling credit card offer multiple bill payment cycle dates as per the convenience of a customer. The payment date depends on the billing date. Hence, based on spending date and when you receive a salary, choose your billing date accordingly. Opt for a credit card with a bank which is flexible vis-à-vis billing date and is willing to change billing date.
Does it make sense to go with co-branded cards?
Choose your co-branded card wisely else, do not go for it if it is not of use. “Co-branded credit cards have an association with a particular brand. You get all the benefits of the card only with the associated brand. You will be forced to spend only with the associated brand, whether you like their products or not,” said Sudheer.
How many cards you should keep at a time?There is no magic number of credit cards a person can or should have. What is essential is that you have the right card and you utilise it right. For instance, if you do not travel much, a travel card is not of much use to you. Similarly, keep your utilisation rate low. “There is no limit to keep credit cards but typically, do not use more than 30-40% of your overall credit limit at a time (during a months period). Decide the number of cards you wish to hold basis these factors. Keep in mind that it is a good idea to retain your oldest cards as they have a much longer credit history,” said Chandani.