Applying for your first credit card is a big decision which can make a huge difference to how you spend money. The earlier you apply for a credit card, the better, as you have the opportunity to start building your credit history. However, you need to learn how to use your credit card responsibly and be sure that you are ready to apply before diving into such a big decision. Here are 5 key things to know before applying.
1. Check the interest rate
When speaking about credit cards, companies will talk about the APR of a card. Beware of companies offering a 0% APR. This can be a great way to get started on your credit card journey as it means for a fixed period of time, you will not be gaining any interest on your spending.
However, this is just a promotional period. It is imperative that you know how long this fixed period will last for and how much the APR will be after the introductory period has finished. You should shop around for the lowest interest rates, taking into account any introductory periods.
2. Look at the rewards programmes
One of the advantages of having a credit card is the rewards that you can benefit from. For example, many cards offer different rewards programmes where you can build points by using your credit card and receive rewards such as cash back, gift cards or even points towards travel or air miles.
All of this can save you money in the long run. Have a look at where you can earn points for different types of cards and how you may be rewarded. For example, if one credit card company has an existing points scheme with a retailer with whom you frequently shop, this may be a logical choice. Similarly, if you are a frequent flyer, it may make sense to take out a credit card with a company who rewards frequent travel.
3. Beware of penalty fees
Before entering any agreements with a credit card company, you should understand the different penalties and fees associated with late payment. Late payments will usually incur a late fee and, depending on the card, could also raise your interest rates. If you understand the penalties going into the agreement, you are less likely to miss payments. Also, if you are comparing between cards and one has higher penalties than the other, you are probably better off choosing the one with the lower interest.
4. Know how to use your card responsibly
It is not enough to be approved for the card in the first place; you should know the best practices for credit card repayment so that you are always building credit in a positive way. One idea for this could be to automate payments; this means that money is automatically deducted from your checking account when your statement is due.
Late payments can not only be costly but can also have a negative impact on your credit score; you should always pay your bill on time. Also, paying in full, as much as possible, is a good habit to get into as it stops your balance escalating to an unmanageable amount and also reflects better in your credit history.
5. Stay on top of your credit utilisation ratio
It can be easy to overspend when you have a credit card as it creates the sensation of having free money. Your credit card company will give you a particular monthly credit limit which will depend on a range of factors.
However, it is understood that you should only be spending some of this amount. The amount of credit you use, versus the amount of credit available, is known as your credit utilisation ratio. The lower this is, the better your credit score will be. Financial experts recommend keeping this ratio at 30% or less as this shows you are living with your means and can handle your credit responsibly.
Regarding credit limit, first-time credit card holders typically receive a smaller limit. However, if you receive a promotion at work or your income has increased for any reason, you can request a higher credit limit. You are more likely to be approved for an increase in credit limit if you have a history of paying your credit card on time.