What to watch out for when buying your first credit card

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If you are a first-time credit card user, or are still thinking about which credit card to go for, it may be tempting to get drawn in by enticing offers like zero annual fees or introductory interest-free periods. However, it’s essential to understand the fine print, including the interest rates, repayment terms, fees, and your own spending habits, to ensure you use the card responsibly.

Credit cards come with responsibilities that, if not handled wisely, can lead to debt traps, high interest payments, and damage to your credit score.

Making informed decisions early on can save you from common mistakes, high interest rates, and long-term debt. Here's what to watch out for when getting your first credit card.

The interest rate, or Annual Percentage Rate (APR), is one of the most important things to consider when choosing your first credit card. In India, APRs can range anywhere from 24% to 48% annually, depending on the card issuer and your credit profile. It’s crucial to note that while credit card companies may offer interest-free periods on purchases, these benefits only apply if you pay your balance in full each month. If not, interest will accumulate, and it can add up quickly.

What to do: Compare interest rates across various banks and card issuers. Always aim to pay off your full balance each month to avoid interest charges.

Many credit cards come with various charges, including annual fees, joining fees, late payment penalties, foreign transaction fees, and even fees for surpassing your credit limit. Some credit cards offer no annual fees for the first year but may start charging fees from the second year onward.

What to do: Carefully review the terms and conditions for any fees associated with the card. Choose a card with minimal or no annual fees if you don’t plan to use the card frequently or don’t need extra features like premium rewards programs.

Your credit limit is the maximum amount you can spend on your credit card. While it may be tempting to use your full credit limit, doing so can negatively impact your CIBIL score. A high credit utilization ratio (the percentage of your credit limit that you are using) can hurt your creditworthiness and make it difficult to get approved for loans in the future.

What to do: Aim to use no more than 30-40% of your credit limit to maintain a healthy credit score. If your credit limit is low initially, focus on using the card responsibly to eventually qualify for an increase.

Credit cards in India offer a wide variety of rewards programs, from cashback on fuel purchases to rewards on online shopping or dining. Choosing a card that matches your spending habits can help you make the most of these rewards. For instance, if you travel frequently, a card that offers airline miles or discounts on hotel bookings might be ideal.

What to do: Evaluate your regular expenses and pick a card that offers rewards or benefits on those categories, whether it’s shopping, dining, fuel, or travel. Many banks offer co-branded cards with companies like Amazon, Flipkart, or major airlines, which can offer additional perks.

Most credit cards offer a grace period — typically 20 to 50 days — during which you won’t be charged interest on your purchases, as long as you pay off the balance in full before the due date. If you fail to pay off the entire balance within the grace period, interest is charged from the date of the purchase.

What to do: Make sure to clear your dues within the grace period to avoid interest charges. Use auto-pay features to ensure you never miss a payment deadline.

Your CIBIL score is your financial reputation. Every time you apply for a credit card, the bank performs a “hard inquiry” on your credit report, which can lower your CIBIL score slightly. Moreover, how you use your credit card — including your payment history and credit utilization — directly impacts your score.

What to do: Use your credit card responsibly by making timely payments and keeping your credit utilization ratio low. Regularly check your CIBIL score to monitor how your credit card usage is affecting your financial health.

Many credit cards offer promotional introductory offers, such as a 0% interest period for the first few months or bonus rewards for hitting certain spending milestones. While these can be beneficial, be sure to understand when these offers expire and what the terms are afterward.

What to do: Don’t be swayed by flashy introductory offers unless they align with your long-term financial goals. Pay close attention to what the card offers after the promotional period ends.

While credit cards offer rewards points or cashback, redeeming these rewards may not always be straightforward. Some rewards programs have restrictions, like minimum point thresholds or limited categories for redeeming rewards.

What to do: Make sure the rewards program is easy to use and offers rewards that you actually want. Read the terms to understand how to maximize your benefits.

Applying for multiple credit cards at once can negatively impact your CIBIL score. Each application results in a hard inquiry on your credit report, which can lower your score, especially if you are new to credit.

What to do: Start with one card, use it responsibly, and apply for additional cards only when necessary.

Getting your first credit card can be a useful tool for building credit and managing finances, but it’s essential to approach it with caution. Pay attention to interest rates, fees, rewards, and how your spending habits will affect your credit. By understanding these key aspects, you can choose the right card and avoid common financial pitfalls.