Credit cards in hand / Image: Unsplash
Image: Unsplash

What to know before you get your first credit card

A credit card can be a very convenient financial tool. You can get one from a bank, which will give you credit and allow you to make purchases without spending your own money. Instead, you borrow money from the bank that you have to repay later with interest. This is different to a debit card, where money is taken out of your account immediately and you can only spend what you have. A credit card allows you to borrow money from your provider to be paid back later, regardless of your actual personal account balance, which can be handy if you have important purchases to be made but have yet to receive a pay check or your student loan. Your credit card also comes with a credit limit, which is the maximum amount you can spend on that card. It varies depending on the card, but you cannot go over this limit.

Your billing cycle tells you when you have to pay back the bank, and this is generally every month, but this can vary depending on the provider. At the end of each cycle, your bank will round up all the transactions you have made and send you a bill called a credit card statement. You have options on how much you pay towards this bill. You can pay your whole balance, which is a good idea as it avoids needless interest. However, you can also choose to pay the minimum amount possible, or some amount in between. Your provider will work out this minimum payment based on your overall account debt and your card’s interest rate. By continuing to pay only the minimum amount, however, you will take longer to pay off your debt and are likely to incur higher interest fees. Credit cards have variable interest rates by default, but some come with introductory, low, fixed rates. A fixed interest rate stays the same for an agreed period, whereas a variable interest rate can be changed at the lender’s discretion. It’s important to keep this in mind when getting a credit card as low fixed interest rates often only last for a year, but they could then end up skyrocketing, causing difficulties for you down the line.

Credit utilisation ratio, sometimes called your debt-to-credit-limit ratio, is how much you owe on your credit cards compared with your total available credit

Most banks will allow you to set up a direct debit, where you can specify that you would like to automatically clear the full balance each month or that you would like to pay the minimum requested amount each month. This ensures you never miss a payment. Missed payments can land you in trouble with your provider and damage your credit score, which can impact your ability to take out loans like mortgages in the future. You don’t have to wait for your bill to arrive before repaying your bank and can pay off your balance immediately, but often your credit score will improve if you stick to a set payment date, rather than paying it off as and when. APR, Annual Percentage Rate, is the cost of borrowing money over a year on a credit card. It takes into account interest, as well as other charges you may have to pay such as an annual fee.

Credit utilisation ratio, sometimes called your debt-to-credit-limit ratio, is how much you owe on your credit cards, in contrast to your total available credit (the total of your credit limits). It is how much you currently owe to the bank divided by your upper credit limit, and it is expressed as a percentage. The lower this percentage, the better your overall credit score will be. Having a higher credit score can make it easier to get additional credit, such as loans, mortgages etc. Therefore, it can be good to take out a credit card and use it for regular small spends to build up your credit score. Some banks may allow you to decrease your upper credit limit, but, if you’re careful, it can be good to keep your credit limit high and your borrowing low, to ensure you have a low credit utilisation and improve your credit score.

Credit cards can allow you to spend on things without using cash or being tied down by what you personally have in your account, but the catch is that you are essentially in debt to your bank. Along with interest, credit cards also sometimes have fees attached for missed payments, late payments, and going over the credit limit. Credit cards can also offer other benefits, like airline points or other rewards. When looking for a credit card, you might want to choose one that has benefits that suit you as well as looking at the interest rates and any additional fees.

Your credit record shows information about how you handle your finances

You can apply for a credit card online, by post, by phone, or at a bank or building society. You will have to fill in a form, and the provider will check your credit record with a credit reference agency, to see if you are credit worthy. Your credit record shows information about how you handle your finances, such as your bank account and any other borrowing you have. It tells the provider whether you are a good at paying back any money you borrow. You can check your credit record yourself by contacting a credit reference agency. However, keep in mind that applying for lots of credit cards can actually impact your credit score so have a good look at what bank you would like to apply for beforehand.

If your application is accepted, you will be asked to sign a credit agreement. This is a legal document which sets out what you and the provider are agreeing to. The credit agreement includes details such as how much you can borrow, when to repay, the interest rate and other charges that can be added, your rights and responsibilities under the agreement, and any other conditions that apply to it.

Some good website to visit to compare different credit cards and check which one suits your needs include Money Saving Expert and Money Facts. Credit cards can be intimidating, but using them effectively can help so much in the long term, from buying houses to taking out loans.

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