How to use a credit card effectively

Nitya has just started her career as a young social media executive. She opened her salary account and studies her financial history for the past few months. Her co-workers have credit cards and she is also considering getting one. She thinks it would help her plan for some of her big expenses, like furnishing her rented place and give her the breathing room she needs to afford expensive gadgets, trips, shopping, etc. She wants to be able to build a solid credit profile while managing her professional career as well as her personal aspirations. She hopes to achieve all of this with the help of a credit card. What aspects should she keep in mind?

Apart from the long-term prospect of building up a strong credit history, having a credit card can also benefit Nitya by giving her higher purchasing power, financial flexibility, and various rewards and benefits, if managed intelligently. That said, the most important aspect of using a credit card effectively is getting a card that suits your spending and lifestyle choices, such as frequent travel, online shopping , etc However, she should note that as her primary source of income, all lenders may be willing to give her a credit card due to a lack of work history and credit score.

The easiest way to get your first credit card is to apply for one from the bank where your salary is credited. Nitya should compare the credit card offered with other entry-level credit cards in the market in terms of rewards and benefits and not aim for something fancy with a high credit limit. It would be best to get an entry or mid-level card that suits him and use it responsibly over a period of time, before applying for a more premium credit card. Ideally, she should limit her monthly spending to 30-40% of her credit card limit.

Since credit cards offer a significant interest-free period, there can be a tendency to overspend. Nitya should keep in mind that if she spends more than she can repay, she will incur high interest charges ranging from 28-49% per annum as well as late payment charges. Failure to pay dues on time will also cancel the interest-free period, in addition to having a negative impact on his credit rating. If she thinks she only needs to pay the minimum amount owed on her credit card, instead of the full amount outstanding, she’s mistaken. Payment of the minimum due will only exempt him from the late payment penalty but the deferred balance will continue to produce interest.

One of the key aspects when choosing the card is to analyze one’s needs and choose the card that best suits one’s lifestyle. Thoughtful and judicious management of the credit card will offer him the flexibility and advantages that will surely enhance his lifestyle.

(Content on this page is courtesy of the Center for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)

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