Credit Cards: Know which card suits you. Look out for 4 key factors

If you are planning to apply for a credit card, then make sure that you opt for the right one. Procuring a credit card is obviously not a big deal for a salaried individual, but remember that not choosing the right credit card could have more repercussions than one can imagine.

There are numerous factors that one should consider before opting for the credit card. These include interest rate, initial fee charges, annual charges and the reward points.

For instance, the rate of interest calculated by what is known as the APR (annual percentage rate) determines the cost of borrowing on credit cards. Besides, using a credit card often can help you earn some reward points which can be redeemed later, thus helping you bring the total cost down.

Here are these factors that help you make a well-informed decision on opting for one credit card over another.

Interest rates 

Although credit cards offer interest-free periods for anywhere between 45-55 days, they charge an interest on unpaid due. Higher the rate of interest, higher the financial burden at a later stage in case the situation goes haywire.

The interest cost can be computed by ascertaining the APR which stands for annual percentage rate. It refers to the annual interest rate that you will pay on outstanding balance.

It can be calculated by using the following formula:

APR = ((Interest + Fees / Loan amount) / Number of days in loan term)) x 365 x 100

A good APR is usually lower than the average prevailing market rate, which can vary depending on overall market conditions and creditworthiness. An APR that ranges between 10 per cent and 15 percent is supposed to be good.

Fees

Most credit cards levy an annual or joining fees. But there are some which waive off the fees. These annual fees can be a recurrent expense and it is an important factor to consider before deciding to get a new credit card.

The annual fee could be somewhere around Rs 500. Some banks, meanwhile, give an offer of waiving off the fee when your annual spend crosses a certain threshold say Rs 50,000 before the annual renewal date.

At the same time, some banks do not charge any joining and annual fees. So, the card that charges you low or no fees obviously makes more money sense.

Reward points

On every purchase, the card user is entitled to the reward points. These reward points can be redeemed at a later stage. This is another key decision to make before opting for a credit card.

For instance, when you spend Rs 150 on a credit card, you stand to earn 4 or 5 reward points which can be later used to book flight tickets and hotels. A number of international credit cards also enable you to get access to a number of airport lounges.

So, being able to earn a large number of reward points is another factor that may work in your favour.

Credit score

A good credit card is issued on the basis of your good credit score. And clearing your credit card bills on time is imperative to maintain a good credit score.

Banks calculate the APR on your credit card based on your credit score. So, it is important to maintain a good credit score to keep the APR lower.

(By arrangment with livemint.com)