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The lure of plastic, with cashless transactions and free credit, is hard to resist, but it can also lead to a debt trap. Here are the things to consider before you choose your first card

1 Check interest rate, charges, penalties

To start with, find out the card's fee structure. Some might offer zero annual rentals, but high interest rates. The right type for you will depend on the nature of your usage. If you are not in a position to pay the outstanding balance every month, it is advisable to choose a card offering a low interest rate, otherwise your interest charge will shoot up significantly. However, if you can pay your balance in full, the interest rate on the card is irrelevant. You may go for a card with high rate, but low or zero joining and annual fee. Also, find out about the penalty for late payment of outstanding dues or for overstepping your credit limit. If you miss a single payment, your interest rates can shoot up from 16-20% to 36%.

2 Consider credit limit and grace period

Before you buy a card, it is important to check the credit limit. If you intend to use it only during emergencies or sparingly, go for a low limit. In fact, it is preferable for the first time plastic user to opt for a low limit to avoid spending sprees. If, however, you have the discipline to indulge in controlled spending, opt for one that offers a high limit, though the annual charges will be high too. Also find out about the grace period--the time you get to pay the balance without paying a fee. Card issuers typically offer an interest-free period of 15-20 days after the billing cycle comes to an end. A longer grace period gives you more time to settle your dues and enjoy interest-free credit. Grace period does not apply if the balance is not paid in full or you pay the minimum amount due.

3 Rewards should suit spending habits

If you are picking a card with rewards benefits, make sure the offers suit your spending habits and lifestyle. So, if you eat out regularly at particular joints, opt for a card that offers reward points or cash back every time you do so. Some cards are more suited to frequent fliers. If you can earn free air miles every time you fly, it can help you save a lot. On the other hand, if you drive, a card that offers reward points to purchase petrol or a waiver on fuel surcharges will be beneficial for you. If you intend to use the credit card to pay utility bills, choose one that rewards you for doing so.

4 Know how balance is computed

Before buying your first card, it is crucial to know how the charges are calculated. The most common method is the daily average balance, where the everyday balance is added and divided by the number of days in the billing cycle. Some cards may compute the balance using two billing cycles, based on the two-cycle balance method, where the interest on your average daily balance is computed using both your purchases from that billing cycle and those from the month before. These cards cost a lot more. The most favourable method is the adjusted balance method, which reduces the balance when payments are made throughout the billing cycle. Fresh purchases made during the cycle are not factored in and charges are lower.

5 Use card responsibly

Do not start with big-ticket purchases on your new card. Make the payments on time and pay the entire balance every month. Avoid carrying forward the balance and maintain a good track record to ensure that your credit score is not affected. Keep the card active even if you are only using it for emergencies; make small purchases once in a while to keep it alive. However, avoid using the card for cash advances as the interest rates charged for such transactions is substantially high and there is no grace period; the interest is charged immediately. Keep track of how you use your card and do not let your spending exceed 30% of your monthly income.

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