WATCH | Applying for your first credit card? Here’s what you need to know

Credit card rules: Thinking of your first credit card? Experts warn this new buying power requires careful management. It is true that a credit card does bring along financial flexibility, but one has to use the card wisely to make sure that one does not go into debt.

Your spending support

A credit card is a financial tool which allows you to make purchases on credit, up to a predetermined limit set by the issuing bank.

When you make a purchase by credit card, the bank or credit card issuer pays for the goods on your behalf, and in turn, you are presented with a bill at the end of the billing cycle. It's always worthy of note that you're obliged to repay the full amount without interest charges.

How does a credit card work?

Basically, credit cards achieve this through a simple yet complex process. It all begins with the making of a transaction: either from a store or when shopping online. Normally, this requires one to swipe the card in, put it into a chip reader, or type its information manually.

This will, in turn, instantaneously trigger the details to reach the card-issuing bank for their authorisation. Here, not only is your credit limit checked but also verification of the identity and whether a transaction is valid.

On approval, the transaction is confirmed, and you are given a receipt for the amount indicative of a successful purchase. At the end of the billing cycle, a comprehensive bill is generated detailing all your transactions in that particular period.

To avoid interest accrual, it's important to repay the billed amount in its entirety before the due date.

This cycle of transactions, authorisation, verification, and repayment is the framework of how credit cards work, convenience and financial flexibility if harnessed responsibly.

First-time credit card applicants must know these things

The first and foremost is to compare available options before committing to a credit card. Comparing some parameters like fees, interest rates, and benefits allows one to come out with an option that best suits their needs.

Understanding the responsibility is quite important; realising the fiscal responsibilities that come with owning a credit card makes one keep the repayments up to date to avoid high interest and to establish a good credit score.

Moreover, having just a single credit card would make it easier to monitor expenses and reduce the occurrence of sliding into debt for the first users. Setting a very conservative credit limit will help to limit one's spending and prevent overextension of finances.

One must know that punctual payments are a necessity. It is always paramount to settle the full amount before the close of the billing cycle to avoid incurring late fees and to inculcate disciplined payment habits.

Carrying out small, regular transactions by credit card keeps it running and strengthens one's credit history for use in future financial undertakings.

Knowing the security features of the credit card, such as CHIP + PIN, itself adds more barriers against spurious activities and/or transactions not initiated by you.

4 costly credit card mistakes you should avoid

Avoid the minimum payment trap

Though paying only the minimum due seems convenient, it can be financially damaging. Interest will be charged on the outstanding amount, and thus, by compounding, the amount of debt increases.

Besides, all new transactions will immediately attract interest and so begin a cycle of spiralling debt. Hence, pay your credit card balance in full and on time to avoid such costly ramifications.

Avoid cash advances

Cash advances offer ready cash but at a pretty steep cost. The interest is charged immediately on withdrawal, in addition to other fees.

Secondly, through this facility, one loses the interest-free period, meaning that fresh purchases will also attract interest from the date of transaction. Avoid this blunder and find other ways to meet your cash requirements. Avoid useless expenses.

Not keeping credit utilisation ratio

Using too much of your credit limit might actually hurt your credit rating. According to paisabazaar, experts opine one should keep a utilisation ratio below 30 per cent for healthy credit scoring. Otherwise, it results in a lower credit rating and reduced availability of credit.

For this reason, ensure that at least 20 per cent of your total credit limit remains unused at all times and request an increase in the credit limit if needed.

Making the wrong choice

Picking a credit card without knowing its fine print wastes time and money.

You might miss earning rewards or fail to use some features if you go for a card that focusses on benefits unrelated to your spending habits or particular lifestyle. For avoiding this error, do thorough research and select one that suits your needs and preferences.