Just started earning? Use credit cards smartly by following these steps

Getting a credit card early in your professional journey and managing it well can go a long way in building a solid credit profile. Then, later in life, when you are looking to fulfil life goals such as buying your own house or funding your child’s higher education or even during a financial emergency, a good credit profile can be of immense value. A good credit history shows banks and other lenders that you have been responsible with credit in the past, and this may help you access large loan amounts easily and at the best interest rates.

Along with the long-term prospect of building a strong credit history, having a credit card can also be beneficial in terms of higher purchasing power, financial flexibility and various rewards and perks it offers. But before you get a credit card, here are some aspects that you should be aware of.

Get the right credit card

There are several credit cards in the market that cater to different types of spenders, such as frequent shoppers, travellers etc. The most important aspect of using a credit card smartly is getting a card that suits your spending and lifestyle. So, if you shop online regularly, look at cards with good online shopping benefits like cashback. Similarly, if you like to travel, consider cards that offer free air miles, airport lounge access, hotel vouchers etc.

However, you should note that as a first-time earner, not all Banks and credit cards issuer may be willing to give you a credit card because of a lack of employment history and a credit score in most cases.

One of the easiest ways to get your first credit card is by applying for one with the bank where your salary is getting credited. Most banks issue entry-level credit cards to young earners after a few months of salary credit. You should compare the credit card being offered with other entry-level credit cards in the market in terms of rewards and benefits on offer, annual fees etc.

Don’t get swayed by premium cards

Most Banks and Credit Card issuers offer premium credit cards that have exclusive benefits and rewards. But these cards also come with stricter eligibility conditions like strong credit score, high-income levels, type of employer, designation, job stability etc.

While it’s easy to get attracted to these cards and apply for them straight away, first-time earners have low chances of approval. In fact, frequent applications and subsequent rejections will only dampen your creditworthiness, and impact your chances for the future as well.

So, it’s best to get an entry-level or mid-level card that suits you, and use it responsibly over a period of time, before applying for a more premium credit card.

Be disciplined with your credit behaviour

Once you get a credit card, it is critical that you use it smartly and responsibly. Since Credit Cards offer a significant interest-free period, there may be a tendency to over-spend. Here are 2 things that you should be aware of, in case you are over-spending through your credit card.

First, credit cards to first-time users usually don’t come with a very high credit limit and if you keep maxing out your credit limit or even go close to it frequently, your credit score may be negatively impacted. Ideally, you should keep your monthly spends to 30  percent- 40 percent of your credit card limit.

Second, if you spend more than you can repay and are unable to pay your credit card bill timely, you will incur hefty interest charges ranging from 28 percent to 49 percent p.a. along with late payment fees.

Non-payment of dues on time also invokes the interest-free period. You have to pay interest on all fresh spends till the date when dues are paid in full. Your credit score too will be hit severely, reducing your creditworthiness and chances of getting another card or loan in future.

Don’t pay just the minimum amount due

A common mistake by credit card users is to only pay the minimum amount due on their credit card, instead of the full outstanding amount, Payment of only the minimum due will absolve you from the late payment fee but the balance carried forward will continue to incur interest.

Here again, your new transactions will also start accruing interest from the date of the transaction and you will miss out on the interest-free period as well.

So, use your credit card responsibly by spending only what you can repay in due time.

If you are facing a cash crunch and find it difficult to repay the total amount due, you can convert the entire bill or unpaid dues into EMIs. The interest incurred on EMI transactions is lower than the finance charges and you will at least be able to save on the excess interest.

Refrain from withdrawing cash

Even though most cards have the option of cash withdrawal, it should be your last option, even during a financial emergency. This is because cash withdrawals through a credit card incur extremely high charges. Card providers levy a heavy interest of up to 52 percent p.a. on the withdrawn amount starting from the date of transaction. You will also have to pay cash withdrawal charges that can be up to 3.5 percent of the amount.

When in a financial emergency, it’s advised to opt for a personal loan or loan on your credit card, instead of withdrawing cash through your credit card. In case you have no choice, you must repay the amount in full as early as possible to avoid additional interest costs incurred.