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How to choose the right credit card
May 28, 2004 12:26 IST
While shopping for a credit card, it is important to keep these tips in mind:
Whether you are paying for your lunch in a hotel, clothes at a designer outlet or cosmetics at shopping malls, nothing is more convenient than a credit card. But the question is how to get the best deal or select the right credit card for you.
The credit card market is ferociously competitive. Card issuers are fighting to win you with increasingly tempting offers, such as interest-free introductory periods and perks.
Shop around for the plan that best fits your needs
With the differing rates and features of each card, choosing a card to fit individual lifestyles can be difficult. Which card is best for you depends on how you plan to use it. People use credit cards in different ways. Some basically use a credit card for identification when making hotel reservations and renting cars. The most important factors for these users would be wide acceptance of the card and the annual fee charged.
Know the grace period
For people who pay off the entire balance every month the first priority in a card is to be sure it has a grace period and to know the length of the grace period.
Also important would be the annual fee and other fees charges such as transaction fees, late charges or over-the-limit charges. These users would want to shop for a card with no annual fee. Another important factor could be the credit limit.
People who sometimes have an unpaid balance at the end of the month would want to choose a card with a low interest rate and a grace period. If there is no grace period, they would pay interest on the outstanding balance whenever they use the card.
Calculation of the interest
For those who usually have an outstanding balance, the most important feature is the calculation of the interest. These users want to get the lowest interest rate possible.
They won't benefit from a grace period because they have an outstanding balance. Another important consideration is how the interest is calculated.
The method used can make a big difference in how much finance charge is paid. Most banks charge 2.95% p.a.; SBI and ICICI Bank charge 2.50%, American Express charges 2.75%.
You should find out how the interest is calculated? Do they use the average daily balance, previous balance or an adjusted balance or some other method?
Almost all companies charge an annual fee, along with an initial membership fee and other service charges. This can add up to a lot, so check these out before you select a card.
However, don't subscribe to a card simply because it does not charge an annual fee. The company's other fees, such as late fees and over-credit-limit fees, might add up to much more in the long run.
A 'cash advance' means you can withdraw money from a bank against your credit limit. Check out if the bank has any ATMs near your house or workplace. This surely helps in times of emergency.
Most companies charge you for this service, so make sure you understand the fee structure. The cost component for a cash withdrawal could be classified as follows: Service fee (transaction fee) each time you take out money, and interest rate for the period for which you have used the money - until settlement date. If you are going to withdraw cash frequently, better watch out for this cost.
Almost all card companies will penalise you each time you make a late payment. Some offer protection services against this fee; others charge a bomb. Check this out.
Distribution networks are important. The acceptability of the card at diverse establishments should also be considered while selecting a card. The more widespread the card-issuer's branches, the more convenient for you.
A global card is useful if you travel abroad a lot. This can be used for paying expenses in foreign currency just like you use a credit card to pay in rupees.
Nowadays, a global card is available at the same cost as a domestic one. It is better to have a global card, especially if there is no premium attached.
Lost card liability
Most card issuers mention in the brochures that lost card liability is Rs 1,000. Be careful, that this is actually after it is reported to the bank.
The liability is actually unlimited before reporting (in cases like this, you would actually be thankful for the (lower) credit limit because though the liability is unlimited - the ceiling should logically be your credit limit, and the outlets accepting your stolen card should actually check that the person who stole your card has not exceeded the credit limit).
Avoid banks that make you liable even for card misuse for a single minute after reporting it.
Free credit period
The days of credit one gets depends on the statement date and the date of transaction. On an average, you could assume you'd get around 20 days of free credit.
However, if you buy just after the statement date, you could end up getting up to 50 days of credit. Look for cards that give you the highest free credit period!
A 24-hour helpline service from the card company helps the cardholders during the non-banking hours. Reporting of theft, checking of available credit limit and other enquiries can be made by the cardholder round-the-clock.
Ask friends and acquaintances about the cards they use. They will have good and bad experiences to relate–use this information in your hunt for the perfect card.
Before deciding on a credit card, be sure to review all the information about the terms. Make a list of the features that best fit your needs and rank them according to how you plan to use the card.
Be sure you understand the terms of a credit card plan before you accept the card. And, once you decide on a credit card plan, make it a point to read all the information the credit card issuers send about the plan. The credit card issuers do make changes that you need to know and understand.
Shop around for the best deal and spend within your means and you will have an excellent means to borrow sensibly over the short term.
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