Things to know before applying for a credit card

A credit card helps you borrow money from a bank under certain conditions. Though your monthly income plays a vital role as the eligibility criteria for the credit card application, there are various factors that you should know before initiating that application. Credit cards are designed to help you manage your day-to-day expenditure. You should only get a credit card after you are aware of various factors involved in the credit card lifecycle.

While applying for a credit card, the following factors are essential for in-depth consideration:

• Secured vs. unsecured credit cards - You can either get a secured or unsecured credit card based on your financial requirements and eligibility factors. A secured card is issued against a collateral such as a fixed deposit. The line of credit issued under this type of card comes with a lower rate of interest and it is largely based on the value of the collateral. While applying for a credit card under the unsecured category, the rate of interest is usually higher and doesn't require any collateral for the card to be issued.


• Interest-free period - Most credit cards offer an interest-free period which is the duration from the date of the transaction to the payment due date. If you are able to make full payment of the amount you have used on your credit card within the interest-free period, you are not paying anything extra to the bank. However, after the payment due date, you will need to pay the applicable interest fee which is usually quite high. It is advisable to pay the full amount on a regular basis to avoid unnecessary fees and charges. These fees and charges are levied on the account due to various reasons. It is essential to go through the terms and conditions in detail before you proceed with the credit card application process.


• Interest rate - One of the main reasons for banks to issue credit cards is the rate of interest. The interest rates on credit cards are typically higher than most types of loans. Credit cards follow the daily compounding interest rate based on Annual Percentage Rate (APR). Based on the type of the card, you may find it on either a fixed or variable interest rate. There are various triggers that can fluctuate the APR and eventually influence the interest rate calculation of your credit card.


• Minimum payment - Based on your credit card transactions, you will be required to either clear the minimum payment or the full amount as a part of the credit card agreement. You can always choose to pay more than the applicable minimum payment. The minimum payment is calculated based on a certain percentage of your current balance or all of the interest amount along with one percent of the principal. The calculation of minimum payment can differ from one card issuer to the other. Before you sign the credit card application form, make sure that you understand how your card issuer is going to calculate the minimum payment.


• Fees and charges - The essential part of a credit card agreement is considered to be the fees and charges section. These are the figures that will help you determine how much you will be paying for keeping the card, failing to make the payments on time or withdrawing cash from an ATM. The following are few of the most common types of fees and charges applicable to various types of credit cards:


• Annual fee - While few credit cards come with no annual charges, certain cards require payment of the annual fee to continue enjoying the benefits. The annual fee can differ for various types of credit cards issued by the same bank. Many banks offer these cards free of cost as the introductory offer, however, once you complete the one-year term, you are charged the annual fee. If you are not sure, ask your bank/credit card issuer if there is an annual fee.


• Late payment fee - When you fail to repay the billed amount within the due date, your card will be charged a late payment fee. The late payment fee could be a fixed amount or a percentage of the billed amount. Depending on the credit card issuer, you may request a waiver of late payment fee, however, it could only be allowed for the first instance as a gesture of goodwill or none.


• Over-the-limit fee - Due to any reason, if you end up using your card over the specified credit limit, your account will attract an over the limit fee which is a percentage of the difference between the specified credit limit and used amount.


• Cash advance fee - You should always refrain from using your credit card for cash withdrawal since it attracts one of the highest charges. You are not only charged for the transactions separately but you are also expected to clear the amount as soon as possible to avoid excessive interest rate. The interest rate for a cash withdrawal is significantly higher and increases your bill amount every month till it is cleared.


• Balance transfer fee - Many credit card issuers provide an option of a balance transfer. If you are unable to manage your current credit card due to a higher interest rate, you can approach a new credit card issuer who offers credit card on a lower interest rate and ask them for the balance transfer option. Balance transfer facility allows a credit card user to switch to another credit card issuer while the current outstanding amount is moved to a new card under the 0% APR for a specific duration.


• Foreign transaction fee - Whenever you use your credit card to make payment for a transaction of another currency, your bank will levy a foreign transaction fee. Based on the bank's exchange rate and processing fee, you may need to pay slightly more than the actual value of the transaction.


• Credit limit - The credit limit is the maximum amount that you are allowed to borrow. Based on your qualifications and eligibility criteria, your credit card issuer will set a credit limit to your account. At any point in time, you are not supposed to reach or be close to the credit limit since it will affect your credit utilisation ratio which can damage your credit score. Most credit card issuers will review your account on an annual, half-yearly or quarterly basis to either increase or decrease your credit limit.


• Perks - On the bright side, your credit card may offer either rewards point, cash back, or any other type of discount or deals. Most credit card issuers offer one or more of these perks as the introductory offer to attract new customers, however, as you go, you may be accumulating rewards point which can help you make payments for various types of transactions. These perks can be considered as extra savings or earnings. When you accumulate a certain amount of point, it can be redeemed to unlock deals and discounts offered through the credit card issuers' partners. Many credit card issuers collaborate with airlines, retail, fuel stations, and various companies and service providers to offer attractive deals to their customers.


• Add-on card - You can extend the benefits of your credit card to your dependents and family members by opting for an add-on card. An additional card is nothing but an extension of your credit cards which you are responsible for paying. When you opt for an additional card, your dependents receive a card which they can use as per their needs, however, the billing is carried out under your name.


• Comparing credit cards - If you are planning to apply for a credit card, one of the best things to do is to compare the available options. When you compared the cards you are eligible for, you will be able to determine a card that suits your requirements. Third-party portals can help you compare many types of credit cards issued by few of the leading banks in India. You can also use these websites to search for the best credit cards in India.

While selecting a credit card, the number options you will come across might be overwhelming, however, your spending habits and the real need of a credit card are few of the most important factors that will guide you in making the right selection. Additionally, credit cards also play a major role in building and damaging your credit score. Banks may offer you credit card deals which are second to none, however, it doesn't suffice as the reason for you to go ahead and take the card. A credit card is a financial responsibility that should be taken seriously. If you have the option to get a secured credit card instead of unsecured credit card, you should consider it for at least improving your credit score with timely payments. If you have sufficient knowledge of how credit cards work and you are sure that you will be able to use it as a tool for your own benefit, you should go ahead and apply for a credit card. Additionally, consolidating multiple credit accounts will help you manage your credit far more effectively.