Credit card essentials for beginners

The thrill of acquiring a plastic card that accords unlimited financial freedom is a joy most people savor. But along with the freedom comes a huge responsibility of managing and handling the card smartly. The chances of misuse and abuse are quite high in case of a credit card especially for people who are beginners in managing credit. Especially teenagers who get their first credit card from parents are more likely to fall prey to the lure of free money which often leads to a debt trap through indiscriminate usage. Utilizing the credit card facilities judiciously requires maturity and understanding of its functioning.

MasterCard and VISA credit cards are seen in this illustrative photograph taken in Hong Kong December 8, 2010. REUTERS/Bobby Yip/Files

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Tip 1: Strict Budget

Easy availability of credit is one of the most tempting reasons for over spending when handling a credit card. Such reckless spending could spell disaster for your financial planning. People end up spending more they can actually afford due to the simple reason that they are not being asked to pay upfront. This is surely not a healthy trend. Credit card beginners must make a strict budget for themselves and stick to it at all costs. Registering your mobile number with the credit card company is a smart move which lets you know your actual usage and balance credit limit so that you can track your expenses. Decide on a monthly limit for usage depending on your financial situation and stick to it at all costs.

Tip 2: Credit Limit

When you get a credit card for the first time the company sets a certain credit limit for you depending on your repayment capacity. However in due course of time considering your usage, income increase and payment discipline the companies will tempt you for enhancement of credit limit. Though a higher credit limit will enable you to buy more expensive items it also could land you in serious trouble of debts. It is advisable not to raise credit limits for the first year of usage so that you get a hang of dealing with credit card bills and understand the implications fully. When you decide to raise the credit limit it should be commensurate with increase in your annual salary.

Tip 3: Full Payment

The credit card bill states the amount due, due date and the minimum amount payable. The concept of minimum balance is one of the most misleading features of credit cards. While by paying the minimum balance you will be able to continue with the facilities, it will also mean an additional interest on the balance due. Normally, credit cards charge around 1.5 % to 3% per month on an outstanding amount which is a very high interest rate. Thus if you don’t pay the full amount due in time the bill for the subsequent month is likely to come quite inflated. Rollovers to next month also have a negative impact on your credit ratings subsequently.

Tip 4: Security of Card

There two vital aspects of your credit card which need to be protected. Firstly the cash advance PIN number and secondly the CVV number. One must never disclose these two numbers to anyone in order to ensure security of the card. CVV number is the number printed on the reverse of your card. Other security measures include ensuring that there is no skimming when you give the card to the salesperson behind the counter while buying items. Additionally while using the card over the internet one must use only authorized and trusted sites. The correct procedure is a two step method which is normally followed by most cards (such as Master or Visa), which requires confirmation such as a Verified by Visa password that is messaged to you once. Make sure that your payment gateway asks for this password while transacting on the internet.

Tip 5: Cash Advance

This is one of the facilities of a credit card that should only be used as a last resort and not as a regular feature. The interest rates applicable on cash advances are the highest amounting to about 30% per annum in most cases. This interest is calculated right from the time you take the money out and continues to be compounded till such time the entire amount is cleared. Any slip ups in payment will lead to incurring huge interest payments. While this facility is a standby measure for emergency money its usage must be done with utmost care. The debit card is much more preferable for taking out money when you need as it is your money and entails no interest on the withdrawal.

Credit card is a very convenient tool, which eases money transaction to a great extent. However there are a few common pitfalls associated with it which need to be noticed and avoided at all costs! The first time users are prone to falling prey to such pitfalls and hence need proper guidance and information when they get a credit card.

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