Tips to make the best use of credit cards

Credit cards not just allow us to make desired expenses even if there are temporary liquidity issues but also ensure we maximise the value of those expenses with benefits like cashback, reward points, special discounts, etc., at no extra cost if we clear our total outstanding in full on time during every billing cycle.

Financial discipline while using credit cards also help their users in building their credit histories and improving their credit scores over a period of time— things that hold them in good stead when they apply for bigger loans like home loans, personal loans and car loans in the future. While many of you have been using this payment tool for a while now, there are still a few important credit card facts that you might not be aware of.

Let’s discuss some of them to help you make informed decisions.

Credit card against FD
It’s a fact that a bank doesn’t offer credit cards to all its customers—they do so to only those customers who meet their eligibility requirements pertaining to minimum income, credit score, type of occupation, etc. However, if you don’t meet all the eligibility criteria, you can approach your bank requesting them to extend a secured credit card against your fixed deposits. Banks normally allow credit cards with limits up to 90% of the FD value subject to terms and conditions. However, if you default on your credit card dues, the bank has the right to recover them after liquidating the collateralised FD.

Credit card-linked pre-approved loan
Banks often extend pre-approved loan offers to their selected credit card customers. These unsecured loans could involve interest rates of 12%-30% p.a., their EMIs get added to the total monthly card dues and are usually linked to the card’s credit limit. However, owing to their pre-approved nature, such loans can be disbursed quickly making them great borrowing tools during any kind of financial emergency.

That said, read the loan fine print carefully, assess its affordability and ensure your balance credit limit (after such a loan is sanctioned out of it) would be enough to accommodate your other card spending requirements before signing up for a credit card-linked pre-approved loan. If you feel the applicable rates are high, you can consider going for other loan products like personal loans and secured loans to meet your borrowing requirement.

Zero fee cards aren’t the best options
While choosing a new credit card, most of us tend to gravitate towards zero annual fee variants for obvious reasons. However, the fact remains that often these zero annual fee cards are the most basic variants with only a few benefits while cards that do charge annual fees come with premium perks and privileges like complementary travel insurance, enhanced rewards programmes, special discounts at reputed hotel and restaurant chains and select e-commerce websites, etc. If you’re looking for a premium credit card, you might want to go for a variant that charges an annual fee if you’re comfortable paying it, especially if you get extra rewards in return.

When used smartly, the value proposition of the rewards of such cards could easily exceed the membership charges. Also, there is no dearth of cards whose annual fee could be waived on meeting pre-defined spending targets. If you use such a card whose benefits are aligned with your spending patterns and the annual fee-waving threshold is within your budget, you could enjoy all the premium benefits free of cost.

Big-ticket expense into EMIs
Most of you may be aware that big-ticket purchases like gadgets, appliances and furniture from select outlets made through credit cards can be converted to EMIs at the time of purchase.

However, many cards also come with the facility of converting eligible expenses (post-purchase) into EMIs to make them more affordable. This is a helpful feature, but users should get complete clarity about applicable charges, if any, before availing the EMI options. Ensure you clear your dues in full on time to avoid additional penalties.

Also, your combined monthly card expenses, including such EMIs, should ideally stay under 30% of your card’s total credit limit to minimise adverse impact on your credit score.

The writer is CEO, BankBazaar.com