As a student, managing finances can be a daunting task, especially when it comes to any form of credit. While credit cards offer convenience and flexibility of making purchases and availing extra funds in case of emergency, they also come with the risk of accumulating debt, if not used responsibly. As first-time users, students should learn how to maximise credit card rewards while minimising debt, as it can set the stage for a responsible credit behaviour in future.
Since students generally do not have an income, they would have limited credit card options available for them. Hence, students who are not eligible for unsecured cards can consider getting a secured credit card against a fixed deposit. Getting add-on credit cards on their parent’s primary credit card is also an option for students. However, add-on cards do not help you build your own credit score; they can only be helpful in understanding how credit cards work and getting an additional purchasing power.
To help students and first-time cardholders make the most of their credit cards, we have listed a few things to keep in mind.
Understand the Features and Benefits
Though students have limited credit card options available to them, it is better to understand the features and benefits offered by the card, along with their associated terms and conditions, before opting for one. The best credit card for you would be the one that is aligned with your spending patterns makes it easier for you to maximize its benefits. For instance, if you frequently shop online then getting a credit card with accelerated rewards on online spends will be a more suitable choice. You should also explore the available redemption options and choose the one where you get maximum value.
There are several other ways to get value-back through a credit card. You can earn bonus rewards on making a certain number of transactions in a month or a quarter or on reaching a pre-set spending milestone. You can plan your purchases in a way that you can make the most of such additional benefits, without the risk of going into debt.
Know about the Fees and Charges
Credit cards come with certain fees and charges including joining fee, annual fee, finance charges, cash advance fee, etc. Understanding how and when these charges are applicable is important as you can use your card mindfully to avoid paying non-essential charges. Annual fee, for example, is one of most important considerations. It is a mandatory charge but it can be waived off if there is a spending milestone offer on your card and you reach the set milestone.
Finance charges are applicable only when you have unpaid balance in your card account or when you withdraw cash from an ATM using your credit card. Cash withdrawals also attract a one-time cash advance fee. Being aware of these charges will help you understand how you can plan your purchases in order to avoid unnecessary charges.
Track Your Credit Utilization
When you get a credit card, you are assigned a credit limit, which is the maximum amount extended to you by the issuer. You should utilize the credit limit judiciously within a well-thought monthly budget to avoid overspending and to save some credit amount for any unforeseen emergencies. If you spend more than what you can afford, the risk of debt increases as you may not be able to repay your credit card dues on time and incur high interest on the pending amount. Also, if you exhaust the entire credit limit regularly, credit bureaus might see you as a credit-hungry borrower, which could result in a credit score drop. Hence, using the available credit responsibly, tracking your expenses and maintaining a low credit utilization ratio (CUR) are some of the favourable practices to prevent debt accumulation and to maintain a good credit score.
Clear Your Dues Timely
Even though card issuers give you the option to pay just the minimum due amount by the repayment due date, it is not a wise move. You must always pay the total amount due on your card on or before the due date. When you pay an amount lower than the total due, you will have to pay interest charges on the remaining balance. When you have outstanding balance in your account, new transactions also become ineligible for the interest-free period. Since credit card interest rates are quite high, ranging from 25% p.m. to 49% p.m., even a small amount can quickly turn into a big debt pile. So, you must try to make your monthly credit repayments timely and in full. You can also opt for the auto pay facility so that you do not miss any credit card repayments.
Monitor Your Credit Score and Report
Besides the variety of features and savings options that credit cards offer, building a good credit score is another major benefit of using credit cards, especially for the first-time users. So, monitoring your credit score and report regularly should be a part of your routine. Through this, you can identify the factors that you need to work on to build and maintain a good credit score. Regularly checking your credit report can also help you identify any error or discrepancy that might be affecting your credit score which you can report timely for correction.
Keeping the above points in mind, students can make the most of their credit cards and, at the same time, build a strong credit profile.
Related Read: Have poor credit score? Here are 7 simple steps to improve it
