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5 steps to check if you are carrying the right credit card

There are many types of credit cards to choose from. Use these five parameters to find the right one

Choosing the right credit card is a tough job. The choice is vast. Some have joining fees of 1 lakh, no-preset spending limit and gold inlay on the card. On the other hand, the basic cards have no joining fees but tighter credit limits. The choice is set to get more difficult.

Banks are seeing demand and are willing to increase their credit card base. For instance, HDFC Bank Ltd, which has grown its credit card business by 28% in the past five years ending 31 March 2015, is expecting a 30% growth in the current year, according to Parag Rao, business head—cards, payments products and merchant acquiring business, HDFC Bank. Almost one-fourth of all credit cards issued in India are from this lender, which has the highest market share.

When banks look at growing their credit card business, it means more cards with different offers, discounts, charges and reward points.

As of now, the number of credit cards in use are less than 5% of the number of debit cards. But transactions in terms value through credit cards at points of sale (POS) are 50% higher than those through debit cards. According to the latest data from the Reserve Bank of India (RBI), the total number of outstanding credit cards was 21.3 million as against 564.7 million debit cards, as of April 2015. However, when it comes to transactions at POS machines, 17,921 crore was spent through credit cards and 11,499 crore through debit cards in April.

Most banks have many types of credit cards in their portfolio. For instance, HDFC Bank has 26 types, ranging from super premium to regular; ICICI Bank Ltd offers 18 types; and Axis Bank Ltd offers 13 types.

In terms of usage, maximum credit card users tend to go for lifestyle cards. “In our basket, the most popular credit cards are the ones that focus on lifestyle needs such as offers on movie tickets and discounts on dining," said Kusal Roy, general manager and head-cards and personal loans, ICICI Bank.

Usually, cards are divided into super premium, premium, co-branded and basic segments. With such a wide variety of cards available, how does one choose the right card?

Mint Money takes a look at five basic parameters that you could use to make a decision.

Step 1: Usage pattern

Take a look at your lifestyle and financial behaviour. “A customer should always choose a credit card after analysing her spending pattern and benefits to complement their lifestyle," said Manoj Adlakha, vice-president and general manager-consumer and merchant services, and chief executive officer, American Express Banking Corp., India.

If you shop often, look for a card that gives you reward points or discounts when you shop at regular outlets. Fuel-related cards work well for those who have recurring petrol or diesel bills as a significant part of their card spend.

Similarly, frequent flier cards that help you earn miles will work for someone who travels regularly.

There is a category of super premium cards. For instance, IndusInd Bank Ltd has a credit card with 22k gold inlay work, and offers services such as invites to special art events, calling a celebrity chef to cook and access to premium golf clubs. “We think that we are best geared to handle the affluent segment (of customers) and are building a robust business around the upper end of the spectrum," said Anil Ramachandran, executive vice-president and head, retail unsecured assets—credit cards and personal loans, IndusInd Bank.

Depending on your lifestyle and usage pattern, you can either choose credit cards by browsing every bank’s website or take the help of a loan portal such as bankbazaar.com, deal4loans.com and paisabazaar.com. But remember that most loan portals only display details of credit cards that they have a tie-up with, so the information may not be exhaustive.

Step 2: Charges

Once you have reviewed your spending pattern, and selected one or more suitable cards, check their attached costs. All credit cards have charges, which are levied directly or indirectly. “The credit card industry has evolved over the years. In 2003, we used to promote credit cards without fees. But then, in 2008-09, the lending space in India went into a turmoil; this was a learning phase for the credit card industry too. Since then, we give credit cards at a fee and customers are willing to pay for the benefits we provide. In fact, we have noticed that customers use credit cards more often if a fee is attached," said Roy.

Here are some of the charges that one should look at.

Joining fee: Super-premium or premium category cards are the most expensive to get. Many banks offer these only by invitation. For instance, HDFC Bank’s Infina credit card (30,000 joining fee), and IndusInd Bank’s Indulge (1 lakh joining fee) are by invitation only.

Joining fee for other segments starts from 1,000 for ICICI Bank, and 299 for HDFC Bank. Many banks waive the joining fee if you spend above a certain limit. Some cards have no joining fee; these are normally basic credit cards that will have other limitations.

Annual fee: The credit cards also come with an annual fee. As an introductory offer, some may not levy this for the first year. But from second year onwards, you have to pay an annual fee. These charges normally range between 100 and 8,000, and may be waived if you transact above a certain limit with your credit card.

You could also look for the words “Lifetime Free" or “LTF" in the card application form. This means that you will not have to pay annual charges till you continue to use the card.

Interest rate: For credit cards, generally interest rates are 22-48% per annum. However, it can vary for different types of cards offered by the same bank. For instance, interest rate on ICICI Bank’s Instant Platinum credit card is 29.88% per annum but 40.8% for its Rubyx Visa credit card. Some banks have a uniform interest rate across types of credit cards; IndusInd Bank, for example, charges 46% per annum for all its credit cards.

Rates are usually lower on super premium and premium products, and also depend on spending pattern. For instance, Citibank’s interest rates range from 33% to 42% depending on various parameters such as card spend, credit limit utilization, repayment pattern and payback.

Other charges: Besides joining fee, annual fee and interest rate, there are some other charges that are applicable. These include cash advance transaction fee, late payment charges, overlimit charges and card replacement fee, among others. For most banks these charges are uniform for all types of credit cards—either 1-2.5% of the amount or a flat charge between 50 and 750.

Step 3: Reward points

All credit cards come with the facility of reward points—points you earn based on your online as well as offline usage. The value of reward points varies, but generally it is 1-8 points on every 40-150 spent, depending on the type of card. For instance, American Express gives one point per 40 spent on its Platinum card but one point per 50 on non-Platinum cards.

When you redeem the points, one reward point could be worth 25 paise-1 depending on the type of credit card. Credit card issuing companies give various options to redeem reward points. Usually there is an e-catalogue which has products from companies that they have partnered with. Always compare the value of reward against spends.

“The value of a point can be calculated by checking the reward’s worth against what was spent to earn that reward," said Adlakha. Credit card companies offer over five kinds of redemption options such as redemption on purchase, conversion of points to air miles, payment of bills, direct credit to account and even gift vouchers for the points.

Step 4: Offers & discounts

“Usually, credit cards have two kinds of offers—one is inbuilt in the card and the other is periodic or seasonal," said Jairam Sridharan, president-retail lending and payments, Axis Bank. Then there are periodic offers that come and go.

But why do credit card companies offer these discounts? “It is an alternative advertising channel for banks as well as companies such as restaurants, shopping malls and airlines. Shopkeepers want footfalls and banks want you to transact more on their cards. So, it works both ways," said Deepak Chandnani, chief executive officer, South Asia and Middle East, Worldline, an electronic payment services company. Every bank that offers a credit card wants the customer to transact with it.

“People have two to three credit cards in their wallets. The objective of offers and discounts is to gain maximum share. With data analysis, we get to understand customer behaviour and target the right product for her," said Roy.

Step 5: Service

Any electronic transaction is exposed to risk of fraud. Banks try to put in robust systems in place to identify and prevent frauds. “We continuously monitor transactions to identify genuine customer transactions from the fraudulent ones. We also have strong authentication processes verified by Visa/MasterCard Securecode or OTP (one-time password) for online transactions. For offline transactions, majority of our cards issued are chip and PIN, which are safe and help reduce card thefts," said Rao.

ICICI Bank offers only EMV (Europay MasterCard Visa) chip-based credit cards, said Roy. Some banks say that their fraud and risk management system on credit cards is usually superior to that for debit cards as credit cards tend to have higher transaction limits. Many banks offer zero liability on credit cards in case of fraudulent activities.

Apart from safety features, services also include add-on cards and instant conversion of payment for large purchases into instalments.

Mint Money take

You should pick a card based on your spending pattern. Also, take the effort to read the list of charges to check where you can spend wisely. Take note of the credit limit. Do remember that irresponsible use of a credit card can damage your current as well as future financial health. It is important to have the discipline to use the card within the credit limit, and pay back the dues in time. If you fail to repay on time, the interest rate (22-48%) can burn a large hole in your pocket, and affect your credit score, which could come back to haunt you at a later stage. There will be a penalty apart from the interest on the outstanding amount. This is true irrespective of the type of card you use. Make the effort to understand all repayment terms such as settlement and closure (read more about these here: http://mintne.ws/1HMFruS) .

Read the fine print carefully. Feel free to ask the customer support executives to explain the details. If you don’t understand in one go, ask again.

If you already have a credit card and want to change it for another one from the same bank, check which features, such as treatment of reward points, will remain the same and which will change, for example, credit limit.

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