Credit Cards for Self Employed – Things to Consider
The policy announcements by the Government to move India towards cashless or less cash economy has become a clarion call to all its citizens to explore new ways of using card based, digital and e-payment pathways to pay for expenses and bills. In this piece mymoneymantra explores how one can acquire a credit card and how credit cards for self employed professionals can make day to day individual transactions easier and convenient.
Credit Cards have been among the initial non cash based payment systems, which has not only survived among the many electronic payment choices, but in some has remained resilient despite growing competition from e-payment options. Traditionally, salaried professionals opted for Credit Cards, as compared to self employed professionals using credit cards. Salaried employees find it relatively easy to acquire credit cards owning to established income stream. Moreover, credit cards have remained attractive for salaried professionals, due to benefits that accrue by way of direct and cross rewards, offers, convenience and ability to track expenses. While it has been generally easier for salaried employees to get a Credit Card, small businesses and self employed could try acquiring Credit Cards for individual non-cash payments.
Despite the advent and growth of debit cards, which is linked to ones savings account, credit cards have thrived given the availability of flexible payment cushion (typically ranging between 30 – 45 days cycle), interesting rewards and various attractive offers. Usually Credit cards are used extensively for travel, shopping, eating out and entertainment, drawing cash, emergency and also during international travel, among others.
Among the different ways for Self Employed to Apply for a Credit Card, a few alternatives are listed below for ease of reference:
Card to Card
Though the norms and offers on “Card to Card” schemes, vary from bank to bank, one of the methods is when a self employed professional leverages an existing credit card relationship to get another one. This is known in industry terms as “Card to Card”. Typically the eligibility criteria for such schemes is that the holder must have had an existing Credit Card for at-least 6 months, with a credit limit of at-least 40,000, ideally with more than 20% of the credit limit being available at any given time, apart from having a good credit rating score. Needless to add, that these are indicative eligibility criterion and conditions vary from bank to bank.
The other method could be, to submit a fresh application for a new Credit Card. Though such schemes again vary from bank to bank, typical eligibility criterion, for such Credit Card for self employed applications requires such professionals to have filed yearly Income Tax Returns (ITR) for annual individual income of Rupees 5 lacs or above apart from having a good credit rating score.
Loyalty Programmes / Co-branded
When a standalone application for new Credit Cards does not go through, self employed professionals could use another route, using loyalty card program, which can demonstrate their expense patterns and thus enable a co-branded card application. Usually consistent spenders in shopping malls, retail stores, entertainment venues stand out as potential card customers over time.
Based on Existing Banking Relationship
Sometimes, an existing strong individual banking history for a self employed customer or a small business may pave the way for getting a Credit Card from that bank. This could either be offered proactively by the bank to provide value add to its own customer or at other times, such cards are usually offered on the back of high levels of deposits and investments. The details of such schemes /offers vary from bank to bank.
However, applying for a credit card by a self employed is only one side of the story. It is important also to understand some key issues as below, given the unique characteristics of this payment instrument :
– There are several types of cards and it may be better to understand ones spending pattern between various channels – such as shopping, fuel and travel, before applying for a card in that category
– Whether one should take a fee or no fee card as usually the latter has a lower rewards multiplier
– What is the kind fee structure being charged – understand the amount of joining and thereafter annual renewal fees
– What kind of interest charges are applicable on unpaid amounts on the credit card (typically seen to be between 36-42%, but vary from bank to bank)
– What type of EMI facilities are on offer by the banks on large purchases
Even though a credit card can be a versatile e payment tool for self-employed professionals, one should be aware of its shortcomings as well. Unpaid expenses on credit cards are usually charged at extremely high rates of interest on the unpaid balance, which could end up escalating an individual’s credit burden. In the end, traditional best practices of financial prudence and avoiding over leveraging of credit cards or loans should remain the guiding line for self employed customers looking to acquire such products and effectively use such payment instruments to reach their desired individual financial and spending goals.