Categories: Business

Credit cards: Interest-free period, perils of paying minimum due — 6 key things to know before getting your first one

Possessing a credit card is not only uncommon but somewhat close to financial necessity in current times. However, before you procure a credit card, be mindful of a number of thumb rules; for instance, the unpaid dues accrue a very high rate of interest — sometimes as high as 3-4 per cent per month or 36-48 per cent per annum.

Also, keep your bill around 30 per cent of the overall credit limit to maintain a good credit score. Here, we share the key features of credit card that every new card user should be aware of.

Six key things to know about credit cards:

I. Credit limit: Every credit card has a set limit. Make sure you don’t overstep the limit. For instance, if your credit card has a limit of 5 lakh then you need to keep the outstanding bills under this limit only.

II. Credit card utilisation ratio: The ratio of usage of credit card to its total limit is known as the credit card utilisation ratio. This ratio should be kept under 30 per cent. For instance, if your credit card limit is 10 lakh, try not to spend more than 3 lakh on the card.

III. Credit score: The clearing of credit card bills and your credit score are directly proportional to each other. So, when you pay your bills on time, your credit score improves, which leads to a higher credit limit for your card.

For instance, if your credit card limit is 5 lakh and you continue to pay bills on time, the chances are that your credit limit will be raised further to, say, 7.5 lakh.

IV. Interest-free period: When you buy something with your credit card, you get an interest-free period of 45 days. But once this period lapses, interest starts to accrue.

V. Minimum due versus total due: When you receive the credit card bill payment, you have two choices: pay the minimum due or clear the bill. It is always recommended to clear the dues instead of paying the minimum due only. When you pay the minimum due, you accrue interest on it.

VI. Cash withdrawal: Although credit cards enable users to withdraw cash, this is a practice best avoided. The interest levied on credit card cash withdrawal is typically exorbitant, so it is not rational.

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