Align credit card perks with your spending behaviour

Paying hefty annual fee is justified if you can extract higher card benefits

Federal Bank has launched a credit card (with three variants) in association with Visa on which it will offer the lowest annual percentage rate (APR) in India, starting from 0.49 per cent per month or 5.88 per cent per annum. Prior to this, IDFC First Bank’s credit cards offered the lowest rate of 9 per cent to select customers.

The interest rate Federal Bank charges will depend on the balance in one's savings account. The interest rate will change dynamically as the balance changes. In addition, the bank will use analytics (which will factor in the customer’s credit score and other parameters) to decide whether to issue a card and the credit limit to offer.

Towards risk-based pricing

As the credit card market matures, it is moving towards risk-based pricing. Explaining the rationale behind offering such a low interest rate, Nilufer Mullanfiroze, country headdeposits, unsecured, cards, wealth and bancassurance at Federal Bank, says: “Customers who keep their savings balances with us tend to have better risk behaviour. We are also keen to reward those who consolidate a higher share of their wallet with us.”

These low rates, however, are not available to everyone.

“Banks offer such low rates only to select customers who have a credit score of 750 or higher. They also take into account the customer’s credit history. These cards are usually offered to people who don’t roll over their dues much,” says Pankaj Bansal, chief business officer, Bankbazaar.

Don’t go by interest rate alone

The interest rate charged on a card is important. “The very idea of a credit card is that you will roll over credit some time or the other. So, you do have to take the interest rate into consideration,” says Bansal.

However, the primary factor you should pay heed to when selecting a card is your spending pattern. If, for instance, you spend heavily on petrol, then go for a card that offers benefits on such expenditure. Similarly, if you are a frequent flyer, then a card that provides lounge access and allows you to accumulate frequent-flyer miles will suit you. “Besides being relevant to you, the rewards and benefits must be significant,” adds Bansal. A card with a zero annual fee is not always a better choice.

“Paying a hefty annual fee on a premium card is justified if the benefits you extract from it exceed the fee,” says Bansal.

Mullanfiroze suggests customers also check out other fees, such as those levied on cash withdrawal from automated teller machines, latepayment fee, etc.

The credit limit on the card must be adequate. The issuer should also be willing to hike it once you begin to reach a credit utilisation level of 50-60 per cent. Regularly using the credit limit to the hilt affects your credit score.

Go with a bank that makes it easy to convert credit card dues into equated monthly instalments. “Doing so can bring the interest rate down to around 9.5-20 per cent,” says Mullanfiroze. Charges on credit cards can go as high as 42 per cent.

Before applying, check out the issuer’s eligibility criteria. “Check the salary requirement, the fixed obligation to income ratio, and so on. Don’t apply randomly to many card providers as each hard enquiry will affect your credit score,” says Bansal.

Pay heed to security

Select a provider that offers a high level of security. “Check whether it has a 24x7 call centre and offers multiple modes of reaching out – call centre, email, SMS, and branches,” says Mullanfiroze.

Finally, check the provider's track record on security. “If you Google its name, along with words like 'breach India', you will get to know if it has suffered any breaches in recent times,” says Udbhav Tiwari, public policy advisor, Mozilla.