Pooja was excited about her first credit card. However, she was quite nervous and apprehensive as well, thinking about the mistakes that she may commit unknowingly.
She approached her friend Malini, who works in a bank, to ask for some tips to consider before using her first card. Malini gave her ten fantastic tips for first time credit card users, which we are going to share with you. Here they are:
Malini told Pooja that it was crucial to make bill payments before the due date. If Pooja misses payments, it would affect her credit score.
Credit score was a term with which Pooja wasn't familiar because she got her first credit card based on her corporate salary account. Nobody had asked her for credit history.
Malini told her that there is a vicious circle of credit which would start forming around her if she started using her credit card irresponsibly. For instance, if Pooja misses even a few payments, her card issuer will report this activity to the credit bureaus, who in turn compile the credit report.
Credit bureaus will mark this activity of missed payments as a negative record on Pooja's credit report, which will stay for seven years. This remark will give a red signal to other lenders in the future.
Now Pooja was curious to know more.
As Malini had already explained what a credit report is, she suggested that it would be best if Pooja checked it at least once in every quarter to keep a tab on her credit score.
Pooja asked Malini how much it would cost her to check a credit report frequently; to which Malini replied, "You can check your credit report multiple times for free on mymoneykarma's portal. they provide various other financial products and services as well.”
Malini also told Pooja that if she applies for a new card or loan, it would incur a hard inquiry.
The hard inquiry occurs when a lender pulls your credit report after you raise a request for new credit.
Pooja still wasn't clear why it was a point a concern. Malini told her that a number of hard inquiries could have a drastic impact on her credit score.
Malini suggested that it was better to buy only those things that Pooja could afford. This suggestion seemed frivolous to Pooja, considering the vast credit limit that she had.
So Malini had to explain further: “Spend only the amount that you can repay at the end of every month. For instance, if you are earning Rs.50,000 but spend Rs. 60,000, will you be able to pay it?”
Pooja was starting to see things more clearly "Is there any budget method that I can follow?"- she asked, to which Malini replied, "Use the 50-30-20 method to set your budget. Whatever your take-home salary is, spend 50% of it on groceries and utilities (basic needs), 30% on wants (other expenses), and 20% on savings and paying off debts.”
Malini suggested that it was best to set a limit on how much Pooja could spend every month through her credit card and keep checking her account statements to track them.
“When you notice that you have exhausted your limit, don't spend any further until you pay off the balance.”
Pooja was intrigued
"Why do I need to set a limit when there is already a credit limit?"
"You wouldn't have heard about credit utilization ratio.” - replied Malini - “I will come to it later."
Furthermore, Malini asked Pooja to schedule auto-debit payments ahead of the due date so that she never misses a payment. Pooja, who was forgetful by nature, found this to be a pretty good idea.
Malini was of the opinion that sometimes when Pooja isn't able to clear the entire payment, she should at least pay more than the minimum due amount.
This would save her from the extra interest that would accrue on the minimum due.
Malini asked, " Pooja, does your credit card have reward points?"
"Yes, it does."
"Do you know how or when you can redeem them?"
"Then, you need to understand the rewards program of your credit card thoroughly to reap its benefits," Malini replied. She knew all too well how many customers remained unaware of the rewards program altogether.
“If there are other charges, such as late payment fees, etc., check about them with the lender and try to avoid them if possible. For example, avoid any late payment fee by paying your dues on time. Some cards may levy an annual fee as well.” Malini elucidated as Pooja nodded along in agreement.
"Malini, you didn't explain that to me yet!" exclaimed Pooja.
"Yes, I will do it now,” Malini said with a chuckle. She had forgotten all about it.
“The credit utilization ratio is the amount you spend vs. your credit limit. Keep it below 30% to protect yourself from the vicious circle of credit that I told you about earlier. In fact, you can set your spending limit based on this percentage."
Now Pooja was glad and satisfied, knowing all the tricks for using her first credit card to manage her finances well. Malini was happy that she was able to be of some help to her friend.
Well, we hope you found this helpful too! Check your credit score to make sure your credit health is spick and span.