Getting a credit card is the first step to feeling more financially secure. Once you start working and receive your salary/pay regularly, getting a credit card is not difficult. Getting that first credit card independently in your name is no less than a milestone.
Let’s deep dive and see how you can use a credit card wisely to manage your finances responsibly and maintain a good credit score.
What is a credit card?
A credit card is a financial instrument that allows you to spend in advance and pay later for your transactions. It allows you to opt for cashless transactions at most merchants these days.
A credit card looks just like a debit card, issued usually by the bank where your savings or salary account is. The bank sets the limit of the credit card. By limit, we mean the maximum amount you can spend on your credit card.
The due date for paying the outstanding amount depends on the bank but usually is between 30-45 days. Non-payment by this date attracts a late payment fee which can be very high if you have exhausted your spending limit.
It should also be remembered that banks charge anywhere between 1-5%-3.5% on credit card transactions. Sometimes even merchants can ask you to pay the credit card transaction fee as they do not want to bear it.
It’s important to be very mindful while using your credit card for shopping or paying bills.
How can I apply for a credit card?
The best way to apply for a credit card is to reach out to the bank where your savings/salary account is. The bank is well-versed in your balances and your savings. They will accordingly advise on which credit card to apply for and the limit.
The application for the credit card can be submitted online via net banking or by walking into a branch. You could also apply for a credit card from other banks and see if they are willing to offer a card.
It is, however, advisable not to hold too many credit cards as it can impact your credit score. So, how do we make sure we use our credit cards wisely to not impact our finances and, consequently, our credit score? Let’s look at it in detail.
How can you use your credit card effectively?
- Make sure you assess your monthly needs before you apply for a credit card. While a credit card gives you the freedom to have extra financial support, it is very easy to overspend on your credit card. Since you don’t need to pay right now for your expenses, you can get carried away with luxury. Setting your credit card limit low and not too high is advisable to avoid unnecessary expenses.
- Set a monthly budget spend on your credit card. Financial discipline starts as soon as you have money to spend. Hence, it’s important to set a limit to remind you not to overspend. Once it becomes a habit, it will be difficult to reverse and manage. Set a monthly budget and stick to it most of the time.
- Take note of the offers/rewards the bank offers on your credit card. Banks usually have tie-ups with merchants across all businesses that can fetch you good discounts, sometimes up to 25%. Keep a note of these and try to shop from these merchants. It saves you money and shows your loyalty to the bank.
- Set a reminder for your credit card dues. You must pay your credit card dues on/before time. Not only it helps with setting your financial discipline, but it also helps in maintaining a good credit score.
- Remember to redeem your reward points. Some banks offer lifetime validity for your reward awards, and some don’t. You earn reward points when you spend on the credit card. Every bank has a different reward point system and makes sure you are acquainted with it. Remember to use the reward points before they expire. Also, note if the bank levies a charge to use the reward points. The charge should not exceed what you redeem on your reward points.
- Opt to pay bills in EMIs. Although it is a very convenient option to manage your bills, it requires extreme financial discipline. The flexibility of paying your bills later, and that too in instalments, can make it difficult to remember when to pay what amount. It is best to set reminders and act on them immediately to avoid late payment charges.
Now, let’s look at how a credit card helps you to build your credit score.
How can you use your credit card to improve your credit score?
- Ensure timely payment of your bills. Banks look at your monthly payment pattern to assess your credit discipline. Over time, banks will know how financially disciplined you are, which reflects in your report sent by the bank to the credit score companies. Make sure you pay your bills on/before time for a good credit score.
- Pay your bills in full. Partial payment of bills indicates your inability to pay your bills completely. It might reflect that you spend more than you can pay on your report. This is important when applying for big-ticket loans like housing loans. Your low credit score will not get you fast approval or a good interest rate on your loan.
- Avoid taking multiple credit cards at once. This also does not reflect well on your credit report because it simply means you have a lot of debt to pay. Try keeping the number of cards to a minimum and spending wisely depending on offers on each card.
These simple steps will ensure your credit report reflects good credit on your account. It will help you negotiate and get better deals for future requirements later.