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This is yet another post from the Suggest a Topic
page, and this time I am going to talk about how to select a credit
card. Radhika had asked this question once quite early on as well, but I
didn’t feel that I have anything really useful to say on it so never
got around to writing the post.
However, searching online made me feel that in general this is an
area on which not much has been written about in an Indian context. So, I
thought I’d write this post and at least start off the discussion, and
present you views on how I would go about searching for a credit card if
I had to do it.
The first thing I did was to look at cash back credit cards in India,
which give you one percent or two percent cash back every time you make
a purchase, but unfortunately I couldn’t find any good cash back credit
cards in India. Some of them have a high annual fee, others make you
jump through too many hoops, and a lot of them have some sort of a limit
on them which considerably reduce their appeal.
In the US, people with a good credit history can get a good cash back
credit card which doesn’t have any annual fee and to me that’s the best
kind of credit card.
Let’s see what you can look at in the absence of such a credit card.
No Annual Fee
The first thing to keep in mind is that your credit card should have
no annual charges. There are a lot of good credit cards without any fee,
so there is no reason for you to go and get a credit card which has an
annual fee.
I believe this to be true for most people, however there will be some
folks out there who feel that the benefit of a particular credit card
outweighs the annual fee, and if you have such a credit card in mind
then that’s fine, but if you are just looking out for a new credit card,
then I’d say look for one that doesn’t have any annual fee.
No Renewal Charges
Another fee I see with some credit cards is renewal fee that has to
be paid at the end of every year. So obviously this is nothing but a
credit card with an annual fee, but the annual fee has been waived off
for the first year.
You may want keep away from such credit cards also.
Convenience to pay off your balance
If you get a credit card from your bank then you will probably be
able to link the credit card with the bank account and pay off your
credit card online, and that is a big convenience. Making it easy enough
on yourself to pay off the balance will ensure that you don’t miss any
payments because your check reached late or you were out of town or
something else like that.
Keeping no balance is an extremely good financial habit, and I’ve
written about how I myself got into a bit of a credit card issue early
on, and you must do everything possible to keep your credit card balance
zero, and the ease of paying it off is just one factor that adds to it.
What do you spend the most on?
In the absence of a cash back credit card the next best thing to do
is to look for a credit card that has no annual fee, and has good reward
points in the area where you spend the most.
For instance if you are working away from your home town, and visit
home say thrice a year then probably a good chunk of your credit card
spending in a year is on air travel, and you should look for a credit
card that has got good reward points. On the other hand if you don’t
expect a lot of air travel but drive a lot then a card that helps you
get rewards on petrol purchase will be beneficial to you.
Selecting a Credit Card
Given the criteria above, say you want to select a credit card now, here is an example of what you could do.
Say you have a bank account with ICICI Bank, and travel a lot. In this case go to Rupee Times Compare a Credit Card section, and select the Issuer as ICICI, Reward as Airline, Annual Fee as Zero Annual Fee, and search for your options.
In this search I got only two results, and if I don’t travel a lot by
those two airlines (Kingfisher and Singapore in this case) then I will
have to broaden my search by going back, and removing the issuer from
the criteria.
That shows up some more options and you can see if any of them are of
any interest to you or not. If you are still not satisfied then take
another category and do a little more research.
Eventually you should find something that is of interest to you, and can explore that option more.
Why am I ignoring Interest Rates?
Because they are so ridiculously high.
Paying interest on a credit card should really be the last thing you
do, and is the worst kind of debt because it can easily snowball into a
much larger number, and is generally spent on stuff that you can easily
avoid.
While it is preferable to have a lower interest rate to a higher one,
you should make all attempts to have your credit card balance zero.
There is really not a lot of science behind this, and it boils down
to evaluating a lot of options, and choosing one that suits you the
best. I hope this post can help you give some ideas on that, and as
always comments are welcome.
Oh, and since we are on the topic, Ask Mr Credit Card, who is a prominent US credit card blogger did a guest post on OneMint early this year about silly ways of using a credit card, and I highly recommend you read that post.
What is credit card interest?
Interest is a charge for providing credit. All credit card accounts have an annual percentage rate (credit card interest rate). The applicable terms and conditions describe how interest is applied on a credit card account.
The annual percentage rate differs from product to product and different rates can be applied to the different types of transactions. For instance some bank products may have a different purchase rate and cash rate, or you may receive a special rate for a balance transfer. All of this is applied to the account's monthly aggregated balance to calculate the interest charge.
Interest charged by the bank can be divided into four categories:
Purchase interest - is interest charged on purchases such as food from the supermarket, paying bills or direct debits such as insurance premiums.
Cash interest - is interest charged on cash transactions such as ATM withdrawals, fund transfers to another account using internet banking or telephone banking, and bills paid over the counter at the bank, or post office.
Special interest - is interest charged on other amounts, such as a balance transfer amount from one banks credit card to another.
Interest on interest - is interest charged on interest charges shown on a statement of account which are outstanding and generated by the three categories above. Additional interest is charged on any interest charges, which are outstanding from the last statement period.
How is credit card interest calculated?
Credit Card Interest is calculated at the end of the statement period, and then charged to your account on the last day of each statement period. The banks start by working out the average daily balance (ADB) outstanding over the statement period. This is done by calculating the ending balance at the end of each day for all the transaction types, adding up each daily ending balance then dividing this by the number of days in the statement period. The banks then calculate the daily rate, they work this out by dividing each annual percentage rate (APR) applying to your card (i.e. standard rate, cash rate or balance transfer rate) by 365, number of days in a year.
Daily Rate = APR / 365. For example 18.15% APR / 365= 0.04973% daily rate.
The bank then multiplies the ADB by the daily rate. Finally, this number is then multiplied by the number of days in the statement period.
When is interest charged?
If interest is charged on your account it will be debited on the last day of your statement period. The first and the last day of each statement period is shown on your monthly credit card account statement.
What is an interest free period?
This is a feature of some credit cards which provides the opportunity to avoid paying interest on purchase transactions, by paying the account in full by the specified payment due date each month.
If your card has an interest free period, no interest will be charged on a purchase if:
You pay the full closing balance by the payment due date for the statement on which the purchase is listed, and
You have paid the closing balance of the previous statement by its payment due date.
The maximum interest free period for a low rate Visa Card is 55 days. 30 days being the length of a normal statement period, and then 25 extra days between the last day of the statement period and the payment due date in which to pay the account in full to avoid purchase interest.
If you did not pay the closing balance on your previous statement in full by the payment due date, your current statement will include interest charges for the outstanding balance, as well as any new transactions made since the closing date on that statement.
What if you don't pay the full closing balance by the due date every month?
If you have a credit card with an interest free period, you will be charged interest on purchases and cash transactions for that statement period, as well as on any new transactions made since the end of that period. This will continue to happen on future statement periods until your closing balance is fully paid in full on or before the due date of the latest statement.
If you don't have a credit card with an interest free period, interest is calculated daily on all transactions regardless of whether you pay the entire closing balance by the due date. Interest charges are debited to your account on the closing date of each statement period.
What if I pay the entire closing balance a few days after the due date?
If you have a credit card with an interest free period and you haven't paid the entire closing balance by the due date, you will lose the interest free benefit for that period. You will also be charged a late payment fee.
Before you apply for Credit Card
Before you apply for credit card, please check our site and compare credit card interest rates.
What is credit card interest?
Interest is a charge for providing credit. All credit card accounts have an annual percentage rate (credit card interest rate). The applicable terms and conditions describe how interest is applied on a credit card account.
The annual percentage rate differs from product to product and different rates can be applied to the different types of transactions. For instance some bank products may have a different purchase rate and cash rate, or you may receive a special rate for a balance transfer. All of this is applied to the account's monthly aggregated balance to calculate the interest charge.
Interest charged by the bank can be divided into four categories:
Purchase interest - is interest charged on purchases such as food from the supermarket, paying bills or direct debits such as insurance premiums.
Cash interest - is interest charged on cash transactions such as ATM withdrawals, fund transfers to another account using internet banking or telephone banking, and bills paid over the counter at the bank, or post office.
Special interest - is interest charged on other amounts, such as a balance transfer amount from one banks credit card to another.
Interest on interest - is interest charged on interest charges shown on a statement of account which are outstanding and generated by the three categories above. Additional interest is charged on any interest charges, which are outstanding from the last statement period.
How is credit card interest calculated?
Credit Card Interest is calculated at the end of the statement period, and then charged to your account on the last day of each statement period. The banks start by working out the average daily balance (ADB) outstanding over the statement period. This is done by calculating the ending balance at the end of each day for all the transaction types, adding up each daily ending balance then dividing this by the number of days in the statement period. The banks then calculate the daily rate, they work this out by dividing each annual percentage rate (APR) applying to your card (i.e. standard rate, cash rate or balance transfer rate) by 365, number of days in a year.
Daily Rate = APR / 365. For example 18.15% APR / 365= 0.04973% daily rate.
The bank then multiplies the ADB by the daily rate. Finally, this number is then multiplied by the number of days in the statement period.
When is interest charged?
If interest is charged on your account it will be debited on the last day of your statement period. The first and the last day of each statement period is shown on your monthly credit card account statement.
What is an interest free period?
This is a feature of some credit cards which provides the opportunity to avoid paying interest on purchase transactions, by paying the account in full by the specified payment due date each month.
If your card has an interest free period, no interest will be charged on a purchase if:
You pay the full closing balance by the payment due date for the statement on which the purchase is listed, and
You have paid the closing balance of the previous statement by its payment due date.
The maximum interest free period for a low rate Visa Card is 55 days. 30 days being the length of a normal statement period, and then 25 extra days between the last day of the statement period and the payment due date in which to pay the account in full to avoid purchase interest.
If you did not pay the closing balance on your previous statement in full by the payment due date, your current statement will include interest charges for the outstanding balance, as well as any new transactions made since the closing date on that statement.
What if you don't pay the full closing balance by the due date every month?
If you have a credit card with an interest free period, you will be charged interest on purchases and cash transactions for that statement period, as well as on any new transactions made since the end of that period. This will continue to happen on future statement periods until your closing balance is fully paid in full on or before the due date of the latest statement.
If you don't have a credit card with an interest free period, interest is calculated daily on all transactions regardless of whether you pay the entire closing balance by the due date. Interest charges are debited to your account on the closing date of each statement period.
What if I pay the entire closing balance a few days after the due date?
If you have a credit card with an interest free period and you haven't paid the entire closing balance by the due date, you will lose the interest free benefit for that period. You will also be charged a late payment fee.
Before you apply for Credit Card
Before you apply for credit card, please check our site and compare credit card interest rates.
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