Should an individual go for a credit card? Well, there is no concrete answer to this, as personal finance experts will flag the product’s ability to land its user into a debt trap. To counter this, one can point out the ‘responsible spending’ factor, under which the credit card can emerge as a more effective payment method.
Credit cards, apart from offering perks and benefits like a one-time signing bonus for a new cardholder, cash back for purchases, rewards points, and frequent-flyer miles, also provide an enhanced safety level than a debit card.
However, you need to keep certain factors in mind, while choosing the right credit card. This article will try to enlighten you on this front.
Be Clear About Your Credit Score Requirements
This factor is crucial and should come on the top of your priority list, while selecting the credit card, as it can significantly impact your odds of approval and your account terms.
While the function of sharing minimum credit score requirements is not performed by all the issuers, they can still offer some general guidance. Certain credit cards may be perfectly suitable for people falling within specific credit score ranges like “fair” or “very good.”
Have A Plan On Using Credit Card
Do you want to use the credit card for daily purchases? Are you ready to put that ‘extra effort’ to maximise your card rewards? Do you travel abroad often? Flat-rate reward cards, multiple rewards cards offering complimentary bonus categories and credit cards exempting foreign transaction fees, are all available in the market. Have a clear roadmap in your mind on how you will make the best use of your credit card and then proceed to select the product.
Also, decide prior on whether you need to finance a large purchase, because a credit card offering an introductory 0% annual percentage rate (APR) to spread out payments over time, will take care of the particular requirement.
The Fee Consideration
Getting a card with an annual fee doesn’t make sense if you are not spending enough. Only if the value of the card’s rewards and benefits exceeds the fee, then paying an annual fee make sense. Also balance transfer fees range from 3% to 5% to USD 30-50, which depends on your balance transfer amount. In that case, think about saving money by finding a card that charges a lower balance transfer fee.
Also, think about obtaining a credit card that doesn’t charge late payment fees. For this, create a payment reminder/autopay feature for the minimum payment account. Also, be mindful about foreign transaction fees, while making purchases outside your home country. You can save up to 2% or 3% per foreign transaction by choosing a credit card that exempts this fee.
The APR Factor
Your credit card’s Annual Percentage Rate (APR) represents the interest rate you will be charged for carrying a balance amount. While choosing a new credit card, aim for an APR which is lower than the average credit card interest rate, as ‘Excellent Credit’ will help you to qualify for the lowest interest rates.
A single credit card can have multiple APRs like ‘Ongoing APR’ (where you will have to pay the charge at a standard interest rate as you carry a balance), ‘Introductory 0% APR Card’ (where the credit card issuers offer a promotional 0% intro APR rate on purchases and/or balance), ‘Penalty APR’ (credit card companies charging a higher penalty APR if the cardholder’s payment is late by at least 60 days) and ‘Cash advance APR’ (credit card cash advances carrying a separate and higher APR that applies even if the customer has a 0% intro APR offer for purchases and balance transfers).
What About Rewards?
We all know that credit cards are known for being generous, when it comes to offering cash back, points or miles on every eligible purchase, to its customers. Rewards come with three earning styles, Flat Rate(rewards providing the same earning rate for every eligible purchase), Tiered Rate (offering bonus rewards on select bonus categories like travel, dining, groceries and gas), Rotating Rate (this earning pattern involves around bonus categories that rotate on a quarterly basis, during a financial year) and Cash Back Rewards (cashback under this category is the easiest one to use as the user can redeem the rewards for statement credits).
Also, be mindful about the rewards points which come with credit cards. These points will help you to earn flexible rewards points, points which offer more value. A tourist can receive a higher redemption value using the points for travel than redeeming for cash back.
Many ventures also partner with card issuers to create co-branded cards, which can be a good option to earn rewards with companies you frequently purchase your products from, say for example flight tickets and hotel bookings.
The term ‘Credit Card Limit’ represents the maximum amount of money a customer can borrow on his/her credit card. The initial credit limit depends on the user’s credit history, credit score, and relationship with the card issuer and other factors.
Do some research before buying the card as you will definitely come across minimum credit limits for some cards. Credit card issuers also review your account for a credit limit increase. However, if you improve your credit, pay your bills timely and update the card issuer with your new salary, it will result in the card issuer increasing your credit limit automatically.
What About Virtual Credit Cards?
Virtual credit cards are the in-built digital cards, which come inside digital wallets like Apple Pay/Google Wallet. These products also come with security measures like tokenization and fingerprint biometrics.
Digital wallets also use Near Field Communication technology (NFC), which allows the information to be transmitted from one device to another in close proximity. Also, consumers’ credit cards remain safe from card skimmers, an act which involves stealing information from credit cards when they’re swiped through compromised terminals/card readers.