How to use a credit card efficiently

Nitya has just started her career as a young social media manager. She has opened her payroll account and is studying her financial history over the past few months. Her colleagues have credit cards and she is considering buying one too. She thinks it would help her plan some of her big expenses like furnishing her rented house and give her much needed breather in terms of expensive gadgets, travel, shopping etc. She wants to be able to have solid credit building profile while managing her professional journey and personal aspirations. All this she hopes to achieve with the help of a credit card. What are the aspects to take into account?

In addition to the long-term perspective of building a strong credit history, having a credit card can also benefit Nitya in terms of increased purchasing power, financial flexibility, and various rewards and benefits if handled smartly. That said, the most important aspect of using a credit card efficiently is getting a card that fits her spending and lifestyle choices such as frequent travel, shopping online etc. However, she should keep in mind that as a first earner not all lenders are. maybe willing to give her a credit card due to lack of work history and credit score.

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

Since credit cards offer a significant interest-free period, there may be a tendency to overspend. Nitya must keep in mind that if she spends more than she can pay back, she will incur hefty interest charges of 28-49% per annum along with late payment fees. Failure to pay dues on time will also revoke the interest-free period, in addition to negatively impacting her credit score. If she thinks she only needs to pay the minimum amount owed on her credit card, rather than the full amount outstanding, she’s wrong. Payment of the minimum amount due will only relieve it of the late payment fee, but the transferred balance will continue to accrue interest.

One of the most important aspects of choosing a card is analyzing her needs and choosing the card that best suits her lifestyle. Thoughtful and judicious handling of the credit card will provide her with the flexibility and benefits that will surely improve her lifestyle.

(The content of this page comes from the Center for Investment Education and Learning (CIEL). Contributions from Girija Gadre, Arti Bhargava and Labdhi Mehta.)

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