When used responsibly, a credit card can help you build a strong credit profile and save on your regular spends. However, for beginners who have limited knowledge of credit cards, it could be difficult to choose the right one from multiple options. Before you begin shortlisting credit cards, the first step should be to understand how a credit card works. You must not consider it as ‘extra’ money, but instead take it is a means to borrow funds that need to be paid back timely.
Having basic knowledge of credit cards will help you make an informed decision, as you will be able to better understand and compare the benefits offered.
Check what you qualify for
Not all card issuers offer credit cards to new-to-credit consumers, and those who do might only provide select entry-level cards. Hence, if you have no credit history, chances are you would not qualify for a number of cards. While this holds true for most new-to-credit applicants, individuals with higher income might qualify for better cards as compared to those who are beginners in their career as well.
Moreover, as a beginner, you would have better chances of approval if you apply for a credit card from a bank in which you have a salary or savings account, or any other existing relationship.
Understand your Need for a Credit Card
Identify if you need a card only for building credit or to enhance your savings on regular spends or a particular category of spends. For credit building, an entry-level low-fee credit card with basic features and minimal eligibility requirements could be the right choice. If you do not qualify for any such card, a secured credit card could also serve the purpose. However, if you are looking to save a considerable amount through credit cards, you must compare multiple options and choose the one that best aligns with your spending preferences.
For instance, if you are a frequent traveler, a travel credit card can help you save on your trips in the form of extra rewards/air miles, complimentary lounge access at airports, etc. Similarly, if you wish to save on your online spends, a card that offers a higher reward rate on online spends could be the right one for you. If you are loyal to a particular brand like Flipkart, Amazon, Yatra or EaseMyTrip, you could also go for cards co-branded with such platforms for substantial savings.
Ask the right questions and Narrow down Your Choices
Once you know why you need a credit card, the next step is to understand how different credit cards could cater to your requirement. Credit cards can broadly be divided into two categories- rewards and cashback, basis the way they offer value-back. Rewards credit cards provide reward points on your purchase, which can later be redeemed to avail discount vouchers, merchandise or converted into air miles or cash credit. On the other hand, cashback credit cards mostly offer a percentage of your spending back into your card account. Ask yourself how you wish to get value-back.
Several other terms and conditions have a role to play in determining the overall value that the card offers. For example, you would want to know how much the card charges as joining/annual fee, what the reward points are worth, whether you are required to meet certain spend threshold to avail benefits, etc. Asking the right questions will help you filter the options as per your needs.
Choose how to apply
Nowadays, you can apply for a credit card through the issuer’s website or through third-party marketplaces. The latter provides you the opportunity to check and compare credit cards from different providers at a single place. If you already have a pre-approved card offer from an issuer, you may not need to provide any documents with your application.
For most users, the first credit card is usually an entry-level card but it paves the way for you to establish credit and qualify for better cards in future. A good credit score also makes it easier for you to avail loans to meet your life goals like buying a house. Hence, it is important to begin your credit journey as early as possible. Get your first credit card, use it responsibly- clear the dues on time and maintain a healthy credit utilization ratio (CUR). When you are confident, move on to better cards with more targeted benefits that will not only help you save more but also improve your credit score, with disciplined usage.
Note: An edited version of this article was published on The Hindu on 4th March 2024.