If you're not using a credit card, you have a problem!
Let's find a way to get the most from your card -- without overpaying it
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In today’s article:
About Credit Cards
One Good Tweet
One Random Fact
I didn’t start building my credit score early on. And I used cash for pretty much everything up until that point.
Let’s talk about…
How to get a credit card?
How to build your credit score from zero to hero?
And most importantly why you should use a credit card!
I know there are a ton of videos and articles out there, but none quite like this one. Because I’m gonna give you an actionable step-by-step approach for repairing or building your credit score from 0 to hero.
Credit cards can be a convenient and more secure alternative to using cash or debit to make purchases.
There is a good chance credit card companies might hate me for this.
Let’s begin
The first thing I did as soon as I started earning money last year was to apply for credit cards. Most of my applications were rejected as I’m new to this space, which in turn dropped my existing credit score. Why? Because banks algorithm thought I was desperate for money.
You might have a ton of questions. Let’s look at it one by one slowly.
My parents told me credit cards are bad…
Yes, credit cards can be dangerous. But credit cards are also a powerful tool if you know how to use them responsibly.
How do credit cards work?
A credit card allows you to make purchases and pay for them later. In that sense, it's like a short-term loan.
When you use a credit card to make a purchase, you're essentially using the credit card company's money. You then pay that money back to the credit card company, with or without interest, depending on the timing of your payment.
Your credit card company gives you a credit limit you can make purchases against. This limit will be based on things like your credit score, income, and account history. As you charge purchases to your card, your available credit shrinks. As you make payments against your balance, you free up available credit again.
How do credit card companies make (a lot of) money?
The credit card companies earn a little bit of money every time you use your card as they charge stores 1 to 3% — called interchange fees— to accept the card. This is one of the ways how they can afford to pay back rewards on every ₹1 you spend.
But banks earn the biggest through defaulters (when people carry a balance, in other words, people who don’t pay off purchases in full at the end of the month). The interest credit cards typically charge between 10 to 30%, sometimes as high as 60%. With interest at 15% APR (annual percentage rate), if you spend ₹50,000 and you didn’t pay it off for a year, you’ll end up paying the bank ₹7500 in interest. If you owe ₹5,00,000 that’s ₹75,000 in interest. Now, consider the APR of 50%, yeah I feel it.
1. How to get a credit card?
To get a credit card, banks need you to partner with them. Either open a savings or checking account with them. Go to your bank or the website and ask for a credit card. If you’re lucky enough to get your first credit card, great. Use it responsibly. If your application was rejected, then…
If you’re new to using a credit or want to improve your less-than-stellar credit history, getting a credit card might be the first good step for you. If your bank isn’t offering you one, then go for a secured credit card.
Wait, what’s a secured credit card?
There are two types of credit cards you can apply for: Secured and unsecured.
Secured credit cards require a fixed deposit, which is often refundable. That’s usually equal to your credit limit and will be used as collateral.
Unsecured credit cards don’t require collateral and are guaranteed based on your creditworthiness.
Secured cards often have less stringent application requirements than unsecured cards.
Get yourself a No annual fees, cashback credit card.
Most of the time, annual fees are terrible and you should never pay them.
In the very beginning with an annual credit card, the breakeven process might be a little daunting. Work your way as you start using them. For now, go for a NO ANNUAL FEE CREDIT CARD.
The only time when an annual fee makes sense is when you’re getting the value that you would pay anyway. Only if you’re getting more value than you would get otherwise.
For example, the credit card gives me a ₹10,000 product for free every year. To get that ₹10,000 product, the fee is ₹5,000. Now, I got ₹5,000. That makes sense.
Best No Annual Fee Credit Cards
Unsecured Credit Card - Slice it and OneCard
Slice it Credit card has no annual fees or joining fees. Offers up to 2% cashback on every transaction.
OneCard has no annual fees or joining fees. Offers up to 5X rewards. And it’s metal.
Secured Credit Card - OneCard Lite
OneCard Lite has no annual fees or joining fees. Offers up to 5X rewards.
Fixed deposit starts from ₹5,000.
Revolving Credit 110% of your deposit. You get an interest of around 6.5% p.a. on your deposit.
2. How to build your credit score from zero to hero?
If you haven’t played and beat that game it’s simply too late and it’s gonna cost you for not having beat that game earlier. And unfortunately, there are no shortcuts or cheat codes that you can take advantage of. You have to play the game and know what’s the rules are.
If you are wondering, how would they make money? As already explained, the defaulters, who do not read this article. They make their profits from people’s ignorance and laziness. You are neither. If you’ve made it this far, you have already won.
Your credit score depends on your creditworthiness, which depends on your credit card spending. It’s like job hunting. To have this job, you need experience. To have experience, you need to have a job.
Get yourself a no annual fees secured credit card (OneCard). I started with OneCard, I deposited ₹20,000 initially of my own money. You need not do ₹20,000, you can deposit as low as ₹5,000.
Now you’ve completed the first step, congratulations. Let me explain the rules of this game. It’s the worst kind of game because it’s not fun, not addicting and nobody explains the rules.Never carry a balance, always PAY OFF IN FULL every single month, no matter what. After you receive your card, set your card to auto-pay.
Have a good UTILIZATION RATIO. Which means how much money you have used, how much money you have access to. If you want an excellent score, let the utilization ratio be around 25%. If you want an excellent score within a short time, your utilization ratio should be around 10% (I know it sounds stupid, but trust me on this).
Going back to the secured you initially got. If you put in ₹5,000 they give you a credit limit of ₹5,500. That 10% utilization will be ₹550. Buy something for ₹550 and pay it off immediately in full each month. Do this for 6 months. Boom there goes your credit score, like a rocket.
Don’t cheat the system, thinking of not spending. You have to spend at least 1%.At any given time don’t apply for more than 2 credit cards at any time.
When you apply for a credit card, they run a hard credit check and that’ll hurt you. So be cautious, and do not apply for a credit card that you believe you’ll not get approved for.
3. Why you should use a credit card?
If you can use the plastic responsibly, you're much better off paying with a credit card than with a debit card and keeping cash transactions to a minimum. Let's examine why your trusty credit card comes out on top, and certain credit card uses and strategies to employ.
One time bonuses
Cashback
Reward points
Free Miles
Safety
When your credit card is used fraudulently, you aren't out any money—you just notify your credit card company of the fraud and don't pay for the transactions you didn't make while the credit card company resolves the matter.
You don’t have the luxury with a debit card.
Keeping vendors honest
Grace period
Insurance
Universal acceptance
Building credit
When not to use a credit card
Paying with credit cards isn't always better than paying with cash. Retailers honour credit cards because they want to make it easy for you to shop there. But the merchants still have to pay the major credit card companies a portion of every sale in the form of a transaction fee.
In India, merchants charge 1 -2% extra on the bill. To cover the transaction fee. I’m not sure if it is legal, but watch out for it.
You can't pay your credit card balance in full and on time
You tend to spend more than you can afford
You can only get a credit card with a low credit limit and you have a hard time staying under the balance
Bottom line:
Credit cards are best enjoyed by the disciplined, who can remain cognizant of their ability to pay the monthly bill (preferably in full) on or before the due date. If you already know how to use a credit card responsibly, shift as many of your purchases as possible to your credit card, and don't use your debit card for anything other than ATM access. If you do, the combination of rewards, buyer protection, and the value of cash-in-hand will put you ahead of those who pay with a debit card, check, or cash.
Two rules to follow.
No annual fee credit card.
Never pay interest.
One Good Tweet…
One Random Fact…
When you fly above 30K feet, your taste buds lose 30% of their sensitivity to sweet and salty foods