Credit cards can be an attractive personal finance option when used properly. On the other hand, if used carelessly they can prove dangerous and land cardholders in a debt trap.
There are several credit cards available in the market offering reward programmes, lower interest rates, higher credit limits, no annual fee and much more, but the features that are best for you are generally based on your actual usage.
With thorough research and a detailed understanding of your needs and product features, it becomes a lot easier to select a credit card that serves your needs. GN Focus looks at five key features that influence cardholders during card selection.
Reward programmes
Credit-card reward programmes are worth considering if you always clear your balance in full each month. You will be offered something every time you spend using your card, such as loyalty schemes, cashback, reward points and miles.
Devendar Agarwal, Head of Assets and Credit Cards, Citibank, says, “Through the rewards programme customers are incentivised every time they use their credit card for retail transactions. The rewards offered on credit cards generally fall into one of three categories — cashback, points or miles. These rewards can be used to get credit on their card account, redeemed for airline tickets, free upgrades or for merchandise/gift vouchers based on the type of rewards programme on the credit card.”
The interest charged on credit cards offering reward programmes can, however, be high. Hence, evaluate if you can take full advantage of the reward scheme offered and also check if there is any expiry term for the accumulated reward points or miles.
Balance transfer
People who have debt on their credit cards with banks that charge a high rate of interest will find that the balance transfer feature is an essential reason to choose a new credit card. Some banks offer interest-free periods on purchases or have zero per cent deals on balance transfers. However, even with these attractive offers, it is important to check the applicable interest rate after the interest-free period.
Anil Chander, Head of Cards, RAKBANK, says, “The balance transfer feature allows a credit card holder to transfer the outstanding balance from one bank’s credit card to another. This is commonly done to transfer high interest-bearing balances from one credit card to another and take advantage of the low interest rate offered for transferring such balances.”
Zero per cent offers, however, last for limited periods only and the duration differs from bank to bank, and after the completion of this period, cardholders may sometimes be charged interest at a higher rate. Hence, when availing of this offer, clear your debt during the introductory interest-free period or choose a card that offers lower rates than your existing card after the interest-free period lapses. Also check the fee charged for moving to a new card. This, however, works out to be cheaper than keeping debt on your existing card with a higher interest rate.
Fees and penalties
A proper reading and a good understanding of charges and penalties will save you lots of dirhams and prevent unnecessary debt. Chander says certain fees and charges apply depending on card usage and the repayment plan. “The most salient ones include the late payment fee, overlimit fee, cash advance fee, returned cheque fee and card replacement fee, among others. However, when deciding on a credit card, a customer’s choice is best made after comparing finance charges with rewards and a bank’s customer service.”
Danielle Suchley, Head of Operations, Fund Advisers, says foreign exchange rates should be given particular attention, especially if you want to frequently use your credit card overseas. The transaction fee can be sometimes as high as 5 per cent, she adds.
Interest rates
If you regularly pay the amount owed on a credit card by the due date, then the interest rate on the card is not a major concern for you. But in any eventuality, such as a change in your circumstances, where you may skip a payment or not pay the full amount, knowing the interest structure on your card is an advantage. The annual percentage rate or APR on credit cards can be either fixed or variable.
Chander says, “The interest rate offered on most standard credit cards issued in the UAE ranges between 2.95 per cent to 3.25 per cent per month. The interest is payable by the cardholder only when they do not meet the payment by the due date or when the amount paid is less than the last statement balance. In such a scenario, a finance charge — commonly called interest — is calculated on the outstanding statement balance until any payment is made, and thereafter on the reduced balance.”
Shehzad Hameed, Regional Head of Retail Banking Products, MENAP, Standard Chartered Bank, cautions that there may be a difference in the interest rates for retail transactions (purchases in stores) and interest rates for cash withdrawal from an ATM with a credit card.
Credit limit
The amount that a financial institution is willing to let you borrow will have a major influence on your selection of a credit card. If you are someone who wants to do all your purchases using a credit card, then a card with a higher limit is what you require. Mohammed Jamil Berro, Group CEO, Al Hilal Bank, says card limit calculations may vary from bank to bank. “As per Central Bank regulations, monthly instalments — including credit-card payments — should be within 50 per cent of total monthly earnings. A card instalment is taken as 5 per cent of the total card limit. Banks offer higher card limits based on salary transfers and other relationships you have with the bank.”
The more you are allowed to borrow, the more attractive it is for you, but this is good as long as you plan to pay the full amount on the due date.
