Use your credit card smartly

Traditionally, Indians have been quite averse to buying on credit. Don't look too far; just ask your dad if he purchased as much on credit, as you probably are now, thanks to your credit card. Your dad probably never owned a credit card and if he did, he probably preferred to use it only in emergencies. But that was in the past; among the many customs and trends that have undergone a change over the last few years in the country, credit card usage probably ranks very high.

Technically speaking, a credit card is an unsecured loan. This means that unlike a secured loan, which is advanced by a bank/financial institution against a security like property for instance, a credit card is offered without any security. In a secured loan, if the borrower fails to make good on his principal/interest commitment, the bank/institution can seize the security as compensation. In an unsecured loan like a credit card that is not possible. Hence banks take necessary steps to ensure that only those meeting certain parameters are qualified to use their credit card.

Without getting into how you can qualify for the credit card, let's understand how you must use your card once you have qualified for one. Credit cards have their pros and cons, which explains the good and bad that get reported about them. Not surprisingly, many of the negatives that get written about credit cards are related to expenses, hidden or otherwise, that the user did not know (or was not informed) at the time of opting for the card. To avoid distress at a later date, we have listed down some points that you must note while using the card:

1. Term and conditions
How many times have you read this before - read the terms and conditions carefully before signing up for anything. For every product you purchase or service you opt for, always read the terms and conditions and that includes credit cards. If you find anything in the terms and conditions of the credit card that was not conveyed to you or is contrary to what was conveyed to you, then seek a clarification from the bank. If you are not satisfied with the clarification, dump the card.

It's important that you read up on the terms and conditions before you use the card and not after. Once you use the card, it is assumed that you have read the terms and conditions and have accepted the same.

2. Annual fees
It is common for banks to waive off the annual fees/membership fees in the first year (cards are usually issued for at least two years). The second year fees are usually charged. It is possible that you are promised that the second year's fees will be waived off as well. The only way to find out is to check with the bank in the second year. It is possible that the bank may waive off the fees based on your track record of making timely payments. If the bank does not waive off the fees in the second year, you can cancel the card. However, if you wish to cancel the card in the second year ensure you do so before using it, because using the card indicates that you have agreed to pay the fees/charges for the second year's subscription.

3. Lifetime free cards
Offering 'lifetime free credit cards' is a relatively new trend in the credit card industry. While there was a time when most banks charged annual fees on their credit cards, the industry is graduating to a level where annual fees are being phased out. In effect, clients are being given lifetime free cards i.e. no annual fees are charged. However, its best to double-check with the bank what the executive has promised you about all annual fees being waived off.


4. Minimum payment
One detail you will find relatively well highlighted in your monthly account statement is the Minimum Payment Due. This is the minimum amount that you must pay for the purchases done in that month so as to not attract a penalty for default on payment of card dues. We would recommend that you pay the entire sum to the extent possible. Buying on a credit card is okay till the time you pay your bills religiously. The moment you carry forward your payment to the next monthly cycle, you will have to pay interest on the unpaid amount along with taxes. In the final analysis this turns out to be very expensive.

5. Payment by EMI
On the same lines, whenever you make a large purchase (usually over Rs 10,000, although the amount varies across banks) you may get an offer from the bank to opt for the EMI (equated monthly installment) facility to make the payment. This facility does not come cheap and the interest on the EMI is prohibitive. Again to the extent possible, we recommend that you make the payment before the due date in one go and give the EMI facility a miss.

6. Borrowing cash is expensive
Credit cards can be used for making purchases on credit as also for borrowing cash. While making purchases on your credit card (so long as you pay on time) is okay, borrowing cash on your credit card is a very expensive affair. Avoid borrowing cash on your card; use the card to the extent possible for making purchases.

7. Insurance benefit
Many credit cards are known to offer an insurance cover. We recommend that you ignore this benefit and go for the core offering - credit card. If the card has features that suit you, then you can opt for it even if there is no insurance cover. On the other hand, if the card features are not to your liking then reject it regardless of the insurance cover. In any case, on most occasions the insurance cover is usually linked with so many terms and conditions that it is very difficult to claim the same. It is altogether another thing that the insurance cover is unlikely to be sufficient for you.