5 things to know before applying for your first credit card

If you’re contemplating getting your first credit card, congratulations! This is a major financial milestone that has a significant impact on your personal finances. When used correctly, a credit card can increase your spending capacity, build your credit history, improve your credit score, and revolutionise the way you pay.

As a newcomer to the complex and fascinating world of plastic money, you may have some apprehensions about getting your first credit card. That’s understandable, but with a little bit of awareness about the top things to keep in mind, you can make a smart decision about your first credit card.

So, here are 5 things you should know before you go ahead and fill out that application form for your very first credit card.

1. Your credit card comes with a limit

Every credit card comes with a credit limit. You can only make purchases on credit up to this limit. For instance, say the limit on your card is Rs. 1,00,000. And say you have already purchased a TV worth Rs. 60,000 on credit using your card. In this case, you can only make additional purchases worth Rs. 40,000 now.

However, as and when you clear each month’s dues, your available credit limit will continue to rise accordingly. So, for instance, if you pay Rs. 5,000 this month, your available credit limit will rise to Rs. 45,000. That said, experts recommend using only up to 30% of your credit limit, so your credit score remains in the ideal zone.

2. You can use your card to build a good credit history

If you have no credit history, lenders may be wary of extending a loan to you, because your creditworthiness has not been evaluated yet. Fortunately, a credit card can help you build a good credit history. All you need to do is repay your credit card dues on or before the due date. If you do this consistently, your credit score will continue to rise, and your credit history will reflect your financial discipline.

You also need to ensure that you pay more than the minimum balance due on your card. Partial payments can affect your credit score negatively, and as a first time credit card user, that is not something you want.

3. Some credit card fees are avoidable

Credit cards come with many kinds of fees, but the good news is that many of these fees and charges are avoidable. For starters, not all credit cards come with annual fees. Secured credit cards, in particular, generally have no annual fee. And in many other credit cards, the annual fees are waived off if you spend up to a specified limit before the card anniversary.

Then, there are late fees that are only levied if you delay your repayment past the due date. Foreign transaction charges may also not be applicable if you do not plan to use your credit card abroad. There are also many cards that come with zero foreign currency markup.

4. You don’t have to always pay interest on your dues

It’s an open secret that the interest rates on credit cards are perhaps the highest among different forms of credit. That said, you can easily avoid paying the interest if you settle your credit card bill on or before the due date. So, no matter how high the annual rate of interest on your card is, you can remain unaffected by it. To ensure that you are able to repay your credit card dues on time, use 30% or less of your credit limit. And keep an eye on your expenses, so you can set aside the amount needed to pay your credit card bills in a timely manner.

Remember that if you don’t pay your credit card bill fully, you will have to pay interest on the outstanding balance. That’s not all. Interest will also start to accrue on any new purchases that you make thereafter. This will continue till you settle the dues entirely.

5. You get to earn even as you spend

A credit card is not all bad. Today, all leading credit cards come with extensive reward programs that help you earn even as you spend. There are three main kinds of rewards that credit cards offer.

• Reward points:

These points are accumulated on your expenses. You can then redeem them on specific lifestyle products and services.

• Cashbacks:

In the case of some expenses, a percentage of your expenses is credited back to your account as a cashback.

• Miles:

Miles are like reward points, except that you can redeem them exclusively for booking your flight tickets.

Conclusion

This sums the top 5 things you should know before you apply for a credit card for the first time. And here’s a bonus tip. If you’re having some trouble getting your first credit card, look for a secured credit card. This kind of card is particularly useful for beginners who have no credit history at all.

All you need to do to be eligible for this card is to have a deposit with the issuing bank. Simple, right? So, that’s something you can consider if you are not eligible for any other card yet.