Perfect credit card for your financial needs: Here's what you should do

One fine day, Aradhana Taneja, a 31-year-old IT professional passionate about travel was walking into a bustling shopping mall in Noida when a credit card sales executive from a well-known credit card provider approached her. Though initially uninterested in hearing about the benefits of the card, two perks grabbed her attention. Firstly, the sales rep said the card required no joining fee; and secondly, the card awarded 3x reward points for each domestic premium economy air ticket purchased using it. Plus, he said, she would also receive generous rewards for every purchase she made in shopping malls. Intrigued by the seemingly cost-free proposition, Taneja decided to go for it.

Fast forward a year, and Taneja was shocked to be charged Rs 3,000 as annual fee. Then it dawned on her that the credit card was not, in fact, free for lifetime. After scrutinising the terms and conditions of the card, she discovered that the card was less beneficial than what she’d been told. She would have to make several mandatory purchases in order to avail the annual fee waiver.

Her case is not unique. Anecdotal evidence suggests that such instances are quite common. And all of them serve as good examples of what can happen when you don’t evaluate your options thoroughly before making a financial decision. It also underscores the importance of choosing the right credit card based on your needs and circumstances. Thus, you should evaluate the potential risks, and costs and benefits of any card before signing up. Careful consideration can protect you from unpleasant surprises, and help you maximise your benefits.

While choosing the right credit card can seem like a daunting task due to the vast selection of cards available, some steps can help you simplify the process, and ensure that you make a choice that best suits your financial needs.

Identify the purpose: Before you shortlist a card, you must identify why you need a new one. For instance, if you are new to credit and want to build your credit score, getting a low-fee entry-level card with basic benefits is best. But if you are trying to rebuild a poor credit history, you might want a secured card, or one that reports to all the major credit bureaus.

On the other hand, if you already have a few cards, you should look for one that helps you save on a category that is not served by your existing cards. Also, some cards offer reward points, air miles or cash back, or a combination of the three. So decide which rewards are most valuable for you, and then look for the cards that offer them. Further, if you like a brand or a platform, you can check if they have co-branded cards. Lastly, you can also look for cards with specific perks like airport lounge access, no foreign transaction fees, and discounts on movie tickets or eating out.

Know your spending pattern: Begin by assessing your financial situation. Ask yourself: Where do I usually swipe my card? Do I pay off my outstanding dues in full every month or carry a balance? If the answer is yes, then look for cards that offer lower interest rates on carried-over balance. These cards may save you money in the long run. Raj Khosla, Founder and MD of financial services marketplace MyMoneyMantra.com, says users should also analyse where they spend the most. “Different cards offer varying rewards for different categories,” he says. For instance, if you travel frequently, consider a card that offers air miles or hotel points. It’s essential, though, to check whether the benefits outweigh the costs. Cards that offer multiple rewards often have annual fees, so it’s better to calculate whether you will use them sufficiently to make paying the annual fee worthwhile.

The critical point to remember here is that the value of a credit card’s benefits depends on your spending habits and your ability to pay off its bill in full every month. A card that suits one person’s lifestyle and spending habits may not be suitable for another’s requirements. So, it’s better to take your time to perform a thorough cost-benefit analysis before applying for a new card.

Cost-benefit analysis: Some cards charge annual fees that can be worthwhile if they are offset by the card’s benefits. But, if you don’t plan on using the card often, these can quickly outweigh the benefits. The cost of a card typically includes the annual percentage rate (APR), annual fee, balance transfer fee, foreign transaction fee and late payment charges. The APR is the interest you pay on the balance carried forward each month, and it can vary based on your card and credit score. Hence, if you anticipate carrying a balance every month, you could get a card with a low interest rate. Finding out these costs beforehand will help you avoid financial pitfalls that result in debt accumulation. Research suggests that many credit card users pay more in fees and interest than the rewards they earn.

“You must analyse if the benefits offered justify the fee charged. For instance, getting an entry-level card with a basic reward rate at a high annual fee may not be smart, especially when you can get better cards at lower fees,” says Rohit Chhibbar, Head of Credit Cards at Paisabazaar.com. Further, it is advisable for travellers to consider cards that don’t charge a fee, or charge less for international transactions. Another aspect to consider is to look at the rate at which you earn rewards. For example, a card with a flat 2 per cent cash back on all purchases can be better than enhanced reward points on transactions done only with select merchants.

Number of cards: There is no rule around how many credit cards you can have. Owning multiple cards comes with its own risks and benefits. “If you own more than one credit card, you can strategically use them to maximise your savings by putting the right spend on the right card,” says Chhibbar. He adds that users can also plan their usage as per each card’s billing cycle, which can help them manage their monthly cash flows smartly. The unused credit limit on multiple cards can also be helpful during emergencies.

However, experts warn that if users don’t manage their credit cards well, it can lead to overspending and increase their risk of falling into a debt trap. Besides, owning too many credit cards with high balances on each might indicate a higher dependency on credit, and make you seem credit-hungry.

Credit card devaluation: Understanding the reasons behind the devaluation of a credit card’s benefits is essential. Typically, a credit card’s value is associated with its rewards. But card issuers can devalue a card by changing its reward structures, reducing the redemption value of points, or increasing the number of points required for specific rewards. Hence, it is crucial to review the new terms of your card’s benefits. Khosla says that it is also better to redeem your points before they lose value, as many cards’ reward points expire over time.

It is also important to understand the new reward structure as it will help you decide if the card aligns with your spending habits or financial goals. If not, you may cancel it. But decide carefully, as closing a credit card can temporarily lower your credit score. “Some issuers let you switch to a different card without a hard credit inquiry,” says Khosla.

In conclusion, it is imperative that you understand the terms and conditions of a card before applying for a new one. Remember, a credit card limit isn’t a gift; it’s a loan that you must repay on time. It is also important to prioritise staying on top of your payments, as any delay can negatively impact your credit score and result in future challenges. Further, you should also keep an eye on your account statements, and set up alerts to monitor for any potential fraud. While enticing sign-up bonuses might seem attractive, evaluating if a card aligns with your long-term financial needs and habits is crucial to maintaining good financial health. 

@imNavneetDubey