Life without a Credit Card is almost unimaginable today. Not only does it offer ease of use and repayment, but is a great medium to build our credit profile, which is one of the key parameters that determine our eligibility and the pricing for lending products like personal loans, home loans etc. While the basic features offered by Credit Cards are similar, to make full use of a Credit Card, you should opt for one that meets your lifestyle and spending habits. This will enable you to utilize attractive cashbacks, discounts and reward points that would help you reduce your transaction costs.
Here are the 8 factors that you need to consider while selecting a credit card.
1. Spending habits: Most credit cards are aimed at certain type of customer segments by offering reward points and other benefits on specific type of transactions. For example, while fuel cards come with higher cashback on fuel transactions, others offer higher benefits on grocery or other regular spends. Credit Cards with travelling benefits offer frequent travelers free air miles, lounge access at airports, hotel stays etc. Similarly, some cards also offer up to 5% cash back on utility spends.
Thus, carefully analyse your spends and transaction pattern and then, opt for the card offering maximum benefits on your top spends. For example, if you spend a considerable amount on refueling every month, then you should opt for a fuel card to save your fuel expenses. Similarly, if your occupation makes you frequently travel by air, then using a travel or air miles card to book your air tickets and hotel stays will make more sense than using other card types.
2. Finance charges: This fee is levied on making ATM withdrawals and on non-payment or part-payment of outstanding balance by the due date. This charge is levied right from the transaction date until the repayment of the entire bill amount. Finance charges can vary widely from 22 to 47% p.a. depending on your card type. Although, it is strongly advisable to avoid using your Credit Card to withdraw cash, because of its high interest rate, comparing the finance charges is still important as there always remains a possibility of incurring this charge due to unavoidable circumstances or financial emergencies.
3. Fees: Credit card issuers make money through their fees charged on various credit card services. Some of the most important charges include joining fee, annual fee, late payment fee, cash advance fee and rewards redemption fee.
Joining fee is a one-time charge while annual/renewal fee is charged every year. Joining and annual fees depend on the card type, usually ranging from Rs 199–5,000. Some credit card issuers waive off joining fee or annual fee or both on applying through online credit card marketplaces like paisabazaar.com. Similarly many card issuers reverse their joining fee or annual fee charge when cardholders spend beyond a threshold amount within 12 months. However, always prefer a card whose benefits in the form of cashback, welcome vouchers, discounts or reward points outweigh the annual fee and joining fee.
In addition to the finance charges, credit card issuers charge a cash advance fee on using the credit card for ATM cash withdrawal. This fee can range anywhere from 2.5–3.5% of the withdrawn amount with most card issuers capping Rs 300 as the minimum fee. This fee can even go higher in case of ATM cash withdrawal at offshore locations.
Rewards redemption fee is charged on redeeming the reward points. As this fee can go up to as much as Rs 50–100 per redemption request irrespective of the number of reward points redeemed, redeem your reward points only for availing expensive products or services.
Late payment fee is levied on non-payment of minimum amount due by the bill due date. Most credit cards fix 5% of the total payment due as minimum amount due.
Apart from these fees and charges, credit card issuers charge a host of other fees and penalties like over limit charges, payment return charges, cash payment charges and outstation cheque processing fee.
4. Credit & cash limits: Credit limit refers to the maximum amount a credit card issuer allows to draw against its card, without incurring any penalty. Exceeding this limit leads to an over limit fee on the amount exceeded. This limit is communicated to the credit cardholder at the time of card delivery and in the subsequent monthly statements. Cash limit refers to the maximum amount that a cardholder can withdraw from ATMs using his credit card.
These limits are fixed on the basis of the cardholders’ credit score, repayment history, personal income and other factors. Credit card issuers can also increase or decrease the credit and cash limits of existing cardholders on the basis of these criteria. In such instances, the card issuer will immediately inform you stating the reason thereof, through SMS or e-mail, followed by a confirmation in writing. Credit cardholders seeking to increase their credit limit too can request their card issuers by directly writing to them and providing financial documents to prove their income.
As lenders, credit card issuers and credit bureaus adversely treat cardholders frequently exceeding 30–40% of their available credit limit, try to opt for a card offering at least 3–4 times of your tentative monthly credit card spends.
Having a higher credit limit also helps in dealing with financial emergencies. Apart from the options of swiping your credit card or cash withdrawal from ATM, you can also avail loan against credit card. These are pre-qualified loans, offered to existing credit cardholders with a good repayment history. These loans do not require any documentation and are disbursed within the same day of the loan application. Their loan tenures would range anywhere from 6 months to five years while their interest rates are mostly at par with personal loans. As the maximum loan amount would depend on your credit limit, opting for a card with higher credit limit will help you avail higher loan amount through loan against credit card.
5. Joining bonuses: Many credit cards, especially in the travel and premium segments, offer attractive joining welcome benefits and bonuses in the form of vouchers and bonus reward points. Some credit card issuers also offer additional joining bonuses to those applying for cards through an online credit card marketplace. Thus, take into account the monetary value of joining bonuses while comparing the various credit card options.
6. Expiry of reward points: Most credit cards reward points expire after a certain period, usually 2–3 years from the date of earning those points. However, there are some card issuers or card types, whose reward points never expire. For example, reward points of credit cards issued by Citibank do not expire. Always prefer cards without expiry period as this feature may force you to indulge in avoidable expenditure.
7. Credit score and other eligibility conditions: Credit score plays a major role in the approval of your credit card application. Usually, people with credit scores of over 750 have higher chances of credit card approval. Other major eligibility criteria include your monthly income and occupational details. While not much can be done with your monthly income, occupation, location, etc, within a short period, you can improve your credit card eligibility by ensuring an error-free credit report. Thus, always avail a free credit report before applying for a credit card and report the errors, if any, with the credit bureau to prevent them reducing your credit score and hence, credit card eligibility. Similarly, do not apply for too many cards within a short period as credit bureaus consider such action as a sign of credit hungriness, and accordingly reduce your credit score. Instead of directly applying with multiple card issuers, visit online credit card marketplace like paisabazaar.com to compare the various credit card options available on your credit score, job profile, location and monthly income without reducing your credit score.
8. KYC documentation: As in case of all financial products, prospective credit cardholders too have to go through KYC documentation while applying for a credit card. Apart from your latest payslip/Form 16/IT return copy as a proof of income, you need to submit documents for your identity and address proofs. While your PAN card, Aadhar Card, Driving License, Passport, etc will act as your identity proof, your Aadhar Card, electricity bill, telephone bill Driving License, Passport will qualify as your address proof.
With the Central Government steadily making Aadhaar Card mandatory in all savings and investment products, it is possible that Aadhaar Card would be made mandatory for credit card and other credit items too. Thus, include your Aadhaar Card as one of your KYC documents as this will save you from the hassle of linking it in future.
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