First things first – if you’ve never had a credit card before, you should make sure you fully understand how one works. Credit Cards, used wisely, are a normal and useful addition to our financial arsenal.
They are NOT magic money cards that allow you to spend freely without responsibility.
With this in mind, a credit card works like this – you agree on a maximum spend limit with a bank or lender, and you then have access to this amount of credit when you need it.
When you spend using your credit card, you are obligated to begin repaying your debt. Usually these days, Credit Cards will offer some sort of interest free period, meaning that if you pay all your debt back within this time, you won’t have to pay any interest. As you let your interest free period lapse with a debt in place, you’ll begin being charged interest. It’s that simple.
The best thing to do is to decide on the limits you’re comfortable with.
This means both the Credit Limit (the amount of funds you have access to in credit) and your spending limit – how often you plan to use the card, how much debt you want to accrue, and how quickly you intend to pay it back.
An easy beginner’s mistake to avoid is to understand that every credit card has different interest rates for specific transaction types.
For example, the interest rate you’ll often see advertised is what’s known as the ‘purchase rate.’ This is the rate you’ll be charged on purchases if you don’t pay your balance down in full by the payment-due date on your regular statement.
When getting your first credit card, be careful to examine the interest-free period on offer. Having a longer period during which to pay down your debt to $0 can be used to your advantage.
With every Credit Card, whether it’s a simple, no frills card or a more complex rewards based card, fees and charges will apply at certain points, and upon certain behaviours.
A simple one to start with is a late payment fee. If you’ve done your homework on your card, and you’ve set up limits for yourself, there’s really no reason not to make at least your minimum repayment each month and avoid this fee.
Another one that’s common is a fee for cash advances on your Credit Card. Be aware that if you withdraw cash with your credit card, you could have to pay both a cash advance fee while also facing interest at a high rate on the cash withdrawn.
Keep in mind that wherever you choose to apply for a Credit Card, there will be multiple things the lender will consider when assessing your application for Credit. If you’re applying at your existing bank, the application process may be slightly quicker and smoother, but generally, here is what lenders look at, and what they may ask for when assessing your application: