Things To Know Before Getting Your First Credit Card: Contrary to popular beliefs, the credit cards are not to be mistaken with “free cash” or else be ready to fall into the trap of endless repayment and paying penalties.
A Credit Card, if used rationally and in a balanced way, can be a huge gift for mediocre spenders as it allows you to spend on your necessities even if you are practically broke.
However, be sure that you will be able to earn cash to repay the amount in time or else there will be penalties in your name. Looking for benefits associated with credit cards? Let’s help you out with a few scenarios:
1. Benefits Associated With Credit Cards
- If you are not earning (or will not be earning) for a while, you can always pay your bills and pay for your necessities using a credit card assured if you can pay for the amount later.
- There are multiple rewards and cash backs that come with the use of credit cards on bill payments and even for shopping.
- Various credit card issuers provide you with insurance on your flight tickets and bus tickets.
- With a good credit history, you can apply for loans easily in any bank.
- Convenience is the middle name of a credit card as it allows you to pay for anything through a card and without requiring you to withdraw cash from ATM every now and then.
But with benefits, there come responsibilities and in this case the wisdom of rational spending. Let’s know things about credit cards to know more about it.
2. Credit Card Interest Rates in India
The interest rate varies from bank to bank in India. However, ICICI Bank is the leading issuer of credit cards in India. The interest rate keeps falling in the range of 1-3% for almost every bank that issues credit cards. Apart from the interest rate, there are other benefits associated with credit cards which have to be kept in mind before purchasing a credit card. For example:
Some banks offer free insurance on ticket bookings through credit card and others provide various cash backs on bill payments. These are a few factors that influence the mind of a buyer. The interest rate depends on the following factors:
- Repo Rate: Repo rate is the rate at which the RBI lends money to the commercial banks of India.
- Reverse Repo Rate: The rate at which the RBI borrows money from the commercial banks of India.
- Repo rate directly influences the interest rate on credit cards whereas the reverse repo rate inversely influences the rate of interest.
- Prime Lending Rate: Various banks fix the interest rate on a credit card keeping in mind the current prime lending rate.
3. Fees on Credit Cards
There are times when a credit card issuer (bank) does not clear the terms and conditions for a credit card. The terms and conditions specify various fees that are to be charged before issuing a credit card to the holder. The fee structure is as follows:
- Joining Fees: These days, many credit card issuers are issuing credit cards without associating any joining fee to it which means that a holder can gain access to a credit card without having to pay any fee in the beginning.
- Annual fees: The free (or paid) credit cards issued are associated with an annual fee which has to be paid on a per year basis. Again, the annual fee to be paid varies from one bank to the other.
- Interest Rate: The main pointer through which a bank earns on credit cards is the interest rate that it charges on these cards. Generally, the interest rates vary from 1-3% in India.
4. Minimum Payment on Credit Cards
In layman terms, the Minimum Payment is a scheme which allows you to settle a minimum amount on your overall (monthly) credit card bill if you are not able to pay the entire bill at once. However, the remaining balance which is carried forward for the next month is associated with a higher rate of interest.
- Save you from a penalty in case of “partial payment”.
- Saves a bad mark on your credit history.
- Interest-free credit period is not provided in case of Minimum Payment
- Keeps you trapped in an endless loop of repayment.
5. How Credit Cards Affect Your Credit Score?
The credit card can hugely determine your credit score as it defines your immediate decisions and management of your debt. If you plan to balance out your spending every month, credit cards can have a huge positive impact on your credit score.
- Your Credit Mix accounts for 10% of your FICO score
- Closing Credit Card Accounts can hurt your credit score
- Your Payment history (or late repayment) can hurt your credit score up to 30%
- The amount of debt you carry can affect 30% of your FICO score.
Also read: How to Check Your Credit Score?