Taking out your first credit card?
Getting your first credit card can be exciting. A credit card brings a sense of financial maturity, providing access to money in times of need and opening doors to useful reward programs. A credit card also comes with a lot of responsibility, some of which you may not be aware of. Here, Friendly Finance offers insights into what to expect and how to use your credit card wisely, helping you to avoid additional fees and debt.
Choosing your card
There is such a range of credit card providers and offers on the market that it can be difficult to know which is best. To help your selection process, think about how you plan to use the credit card for and find a card that meets those requirements. This guide explains the different types of cards available and some of the features associated.
Also, review the eligibility criteria you need to meet to be accepted for the credit card. If this is your first time taking out any sort of finance, your credit score may not be good enough to be approved for a premium offer. Only apply for credit cards you have a chance of being accepted for and work your way up to the better offers by building your credit history over time.
Using your credit card
Your credit card essentially works like a debit card you have for your bank account. The credit card provider will issue you a statement at the end of the month showing the amount of money spent and the minimum amount owed. Your credit card will come with a credit limit. The credit limit is the amount of money you can spend on the card and is decided by the credit card provider based on their assessment of your application.
You can charge up to the credit limit, however, this isn’t recommended for a couple of reasons. Firstly, hitting your credit limit too soon after receiving your credit card may alert the provider. They can lower your credit limit moving forward or increase your interest rates if they feel you are at risk of being unable to repay. Secondly, using the maximum credit available may negatively impact your credit score, which could limit the future credit options you have available to you. It is recommended that you use around 20-30% of your credit limit on any given credit card.
Typically, you do not need to pay to take out a credit card but you will incur costs over time. The 3 main categories of charges you can experience are:
- Annual or monthly fees for having the card.
- The interest rate on an unpaid balance. If you repay the full outstanding amount on your card each month you will not pay interest fees.
- Charges for breaking the agreement. These range from missing a payment to exceeding your credit limit.
You should review the full list of fees and charges before using your card to avoid unexpected costs. The credit provider should make these available to you either online or in writing when the credit card arrives.
Benefits of using a credit card
- Credit card payments are accepted on the phone, online and in-stores. You can also use your card abroad (fees may apply), giving you access to money wherever you are.
- A credit card can be used to purchase large ticket items, making manageable repayments each month. Using an interest-free credit card could mean it costs nothing to borrow the money if you repay before the interest period runs out.
- Credit card use can help build up a credit history and improve your credit score. Having a good credit score will help in the future. For example, you when you apply for a mortgage or want to borrow money at a lower interest rate.
- Credit cards can help monitor expenses by clearly showing what you are spending each month. This can help you towards your budgeting goals.
- There is an added insurance purchasing goods using your credit card. You can arrange to withhold payment for faulty goods by contacting your card provider.
Potential pitfalls to using a credit card
- The access to money can tempt users to overspend. Inability to repay will lead to additional charges and debt.
- Too many credit cards can negatively affect your credit score.
Top Tip – A credit card is a very useful financial tool is used properly and repayments are made on time. Unfortunately, too many users fail to use credit cards responsibly and spiral into debt. To avoid this, we recommend you do not use your credit card to paying off existing debts as this is not a long-term solution and can lead to higher charges. Also, only use your credit card to live within your current means and budget. Buying things that aren’t in your budget or aren’t essential will increase your likelihood of becoming in debt.