Five things to consider when you apply for your first credit card

Credit cards have become quite popular these days as they allow you to defer payments for purchases to a later date, free of interest. These interest-free periods range from 15 to 30 days, after which you are charged interest on unpaid amounts. Some cards offer additional benefits such as rewards and cash-backs.

Overall, it is a win-win situation for credit-card holders. With these cards being accepted in most retail outlets, and with everyone around you swiping cards for almost all payments, it's tough to resist the allure of this powerful financial tool. However, before you apply for your first credit card, keep these five things in mind:
 

1) Check the interest-rate charges and penalties

The first thing that you need to check is the card’s fee structure. Some cards offer zero annual rentals but charge high interest. The right card for you will depend on the nature of your usage. If you are not in a position to pay the balance every month, it is advisable to choose a card offering low interest rates, otherwise your charges will shoot up significantly, and you will get caught up in a debt trap.
 

2) Check credit limit and grace periods

If you don't plan to use your card regularly, i.e., if you intend to use it only for emergencies, then you should opt for lower limits. In fact, it is advisable for first-time users to opt for a low limit to avoid uncontrolled spending.

You also need to find out about the grace period — the time you get to pay back the balance amount without paying a fee. Card issuers generally offer an interest-free period of 15-20 days after the billing cycle ends. A longer grace period gives you more time to settle your dues and enjoy interest-free credit.
 

3) Understand how the balance is calculated

As a credit card customer, it is very important to understand how the outstanding amount is calculated. The most common method is the daily average balance; under this, every day, the balance is added and divided by the number of days in the billing cycle. Few issuers use the adjusted balance method, which reduces the balance when payments are made throughout the billing cycle.
 

4) Reward points / cash-backs should suit your spending habits

If you choose a card with rewards/cash-back benefits, make sure the offers suit your spending habits. For example, if you eat out regularly at restaurants, then opt for a card that offers reward points or cash back every time you do so. Some cards are more suited to frequent fliers. If you can earn free air miles by using your card every time you book a ticket, it can help you save quite a bit. On the other hand, if you drive a lot, a card that offers waivers on fuel surcharges could be more suitable.
 

5) The card should be used responsibly

This is a very important point. No matter which card you eventually choose, make sure you make your payments on time and pay the entire outstanding balance every month. Avoid carrying forward the balance and maintain a good track record to ensure that your credit score is not affected.

You need to always remember that a credit card is simply a type of loan, and like any other loan, you have to pay it back eventually. So it is best to use your credit card responsibly and carefully.

Disclaimer: Copyright Kotak Mahindra Bank Ltd.