Are you thinking of applying for a credit card for the first time, but unsure about what type of card to choose?
Whether you have just turned 18 (the minimum age to be able to apply for a credit card) or are in your 30s andjust beginning your credit journey, there are some factors to consider before taking that first step.
1. There is a big difference between debit and credit cards
Debit and credit cards work in similar ways; they both have the logo of major credit card companies like Visa or MasterCard; they can be swiped for payments instead of using cash and usually require a pin for transactions.
But there is one big difference: debit card payments come off your bank account while credit card payments are made using credit which you need to pay back later. For first time credit users, the repayment of this money, if done in full and on time, can help to build your credit reputation andimprove your credit score.
2. Know how to use credit wisely
A credit card is a convenient way to make purchases, but it should never be used to make purchases you can’t afford. If used incorrectly, using too much credit, or relying on it too much to get you through each month, can cause debt, higher interest rates and financial stress. Before you apply for that first credit card, you need to learn how to manage your spending, what you should consider before applying and whatcredit card options may be right for you.
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3. Have a look around at what’s available
First time credit card applicants should shop around before you apply – there are a multitude of options available to you and each with their own benefits, and limitations. It is also important to understand that you won’t have a high credit limit when you start out as you won’t have a credit history – lenders and card providers look at your credit history andcredit scoreto determine your affordability and ultimately how much you are able to repay each month.
4. Be aware of the ‘cost of credit’
Credit cards can be expensive credit products – from card initiation fees, monthly service fees, transaction fees, interest rates and more. These fees are charged by card issuers, banks and lenders and the costs can add up significantly.
It is therefore important to understand these charges and what they are for before you apply for your first credit card so you know what you could be getting yourself into. Credit providers are, by law, required to clearly disclose interest rates, fees and charges on their websites so you can easily calculate what the monthly cost will be for using a credit card.
5. Know the jargon
Understanding the terminology used in the credit industry may prevent costly decisions and can help you choose the right product for you.
Here are some of the main terms you should know:
Credit limit:the total amount of money that you are allowed to spend on your card. Everyone will have different credit limits and these are set according to your credit score: the higher your score, the more credit you are likely to be given. When you have had your credit card for a while, the issuing lender or bank may offer to raise your credit limit.
Minimum payment: the smallest amount you need to repay each month on your card. This is calculated as a percentage of what you owe and includes interest – usually between 3% and 5%. Remember to look at the ‘small print’ for terms relating to the minimum payment as these can vary between lenders and card providers.
Interest rate:this is charged monthly if you don’t pay your full balance each month. Of course, the benefit of having a credit card is to be able to pay off the amount you have borrowed (the balance) over time which means you will almost always be charged interest.
Fees:there are fees for opening an account (this is a once-off initiation fee), using your account (monthly account fee), late payments, going over your credit limit and using your card overseas. Make sure you know what all of the fees are so you are not caught out.
6. How to decide
If you can manage the urge to spend more than you can afford (remember credit is not money in your bank account) and make your repayments on time, a credit card can help you build a good credit history and credit score. Why not try a digital credit card like FASTACard? Safe and convenient to use when making payments online, FASTACard is a great product tostart your credit journey.
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