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7 Rules To Live By When You Get Your First Credit Card
Smart Money

7 Rules To Live By When You Get Your First Credit Card

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Getting your first credit card can be a pretty heady experience. Just like that, you suddenly have access to hundreds, or even thousands of dollars that you can spend exactly as you please. The trouble is, while you’re free to flex your plastic wherever, whenever, you will have to pay all that spending back, preferably sooner rather than later.

If you want to avoid the pitfalls that often go hand-in-hand with getting your first credit card, it pays to know what you’re up against. Which is why we’ve created this handy list detailing seven essential rules to live by as you learn to live with your new card. Don’t worry, you can thank us later.

Choosing the Right Card

First though, let’s take a step back. If you’ve not yet applied for your first credit card, let’s run through what you should look for as you compare your options.

Think you can apply for any card you like? Think again. When you first start out with credit, your options will be limited. Higher end rewards cards and premium cards packed with perks tend to have strict eligibility requirements, only approving applicants with excellent credit, who earn over a certain threshold.

As a credit newbie, your credit report is probably pretty bare, and unless you’ve catapulted into a high-flying career, your income may also be lacking. Which is why, when you start out with credit cards, basic is best.

Want a rundown of the various types of cards you can choose from? Here goes.

    • Student Credit Cards. If you’re a student, you may be able to apply for a student credit card. These cards typically waive annual fees for students, while also offering lowered eligible criteria to allow lower income earners without much of a credit history to apply.
    • No Annual Fee Cards. These cards charge no annual fee, which can help you keep your ongoing costs to a minimum. Due to their basic nature, they typically don’t offer much in the way of extras, but this can work well as you’re getting used to accessing credit, as there’s nothing to distract you or encourage you to spend.
    • Low Rate Cards. These cards offer a low interest rate. As a result, they can work well for beginners. If you overspend on occasion, interest will accrue more slowly as you work on paying down what you owe.

 

Of course, there are other types of cards on the market, but they may not be the best choice as you get to grips with credit. Save these cards for later when you have your credit card habits in hand, and your spending firmly under control.

    • Rewards Cards. Rewards cards reward spending. If you don’t make the effort to spend on them, you will likely pay out more in annual fees than you get back in rewards value. Until you have the income – and willpower – to spend more and within your means, it’s best to avoid rewards cards if you can.
    • Premium Cards. As we mentioned, high end cards typically come with high end eligibility requirements. And while they may offer lots of lovely extras, these cards also come at a price. Hold off on applying for a premium card until you can afford the higher annual fee, make good use of the extras, and meet the eligibility requirements.

 

At this point, it’s also worth mentioning introductory offers. Just like rewards and extras, intro offers are designed to entice new cardholders to sign up. But, just because a card has an awesome intro offer, doesn’t mean it will suit you in the long term. Look beyond the offers to compare more important factors, such as the following.

    • Interest: Try to choose a card with a super low rate, if you can. Credit card rates range from as low as 8% p.a. to as high as 22% p.a. As a beginner, choosing a card with a low rate gives you a nice cushion to fall back on if you happen to overspend.
    • Annual Fees: Opt for a card with a low annual fee, or no annual fee, if possible. Starter credit cards tend to be basic, so there’s no point paying through the nose in annual fees if you’re only getting the minimum in extras in return.
    • Other Fees: As you use your card, you should try to avoid fees whenever you can. With that being said, it’s a good idea to choose a card with low fees, just in case you mess up. Foreign transaction fees are definitely one to look out for, especially if you plan to use the card to travel or shop online with overseas retailers.
    • Account Access: Getting to know your account is crucial in these early stages. Make sure your card offers account access online or via an app, so you can track your transactions and pay your bills more easily.
    • Basic Extras: While you won’t get premium perks like airport lounge access and travel credit with your basic starter card, you may benefit from a few nice extras. Keep an eye out for these, offered either by the card provider, or by the card issuer, Visa or Mastercard.

 

7 Rules for Starter Credit Card Users

Now then, time to get into those rules.

#1. Learn How Your Card Works

While your new credit card may look a lot like your debit card, it plays by a different set of rules. Before you start using your card, it’s a good idea to find out more about what those rules are, so you know what you should and shouldn’t do with your card.

Interest

First up, interest. Your card will have both a purchase rate and a cash advance rate. Transactions that are processed as purchases attract the card’s purchase rate, while transactions processed as cash advances – such as ATM withdrawals, foreign currency, and lottery and gambling transactions – attract the card’s (usually much higher) cash advance rate.

With that being said, there is an easy way to avoid paying any interest at all. In terms of purchases, your card will most likely offer a grace period of 44 or 55 days, where interest isn’t applied. Essentially, this means you can make purchases through the month, with no interest to pay until your statement due date the following month.

As long as you pay your closing balance by that due date, you can avoid paying interest on the purchases made during the month. Going forward, you will continue to enjoy interest-free purchases, as long as you keep clearing your balance when it’s due. As for interest on cash advances, you can avoid that by not making cash advances.

Fees

Now to your card’s fees. Unless you chose a card with no annual fee, you will have to pay that annual fee each year. However, you can avoid other fees by getting to know when and where they’re charged.

As an example, you can avoid late payment fees by always making your repayments on time. You can avoid over-limit fees by tracking your spending so that you don’t go over your credit limit. You can avoid cash advance fees by avoiding cash advances.

You may pay a fee on transactions made in a foreign currency if you use your card overseas, or shop online at international retailers. This fee can’t really be avoided unless you choose not to do this type of spending on your card, or you choose a card with no foreign currency conversion fees.

Extras

If your card offers extras, find out how to use them. On basic cards, extras tend towards security features, such as fraud monitoring and zero liability policies, and payment features, such as contactless payment options and compatibility with digital wallets.

You may find you have access to extras provided by your card issuer as well, whether that’s Visa or Mastercard. Visa Offers, for example, provides cardholders access to exclusive discounts with featured retailers, entertainment providers and travel operators. Mastercard Priceless Cities works in a similar manner, for Mastercard holders.

While these extras may not set your world on fire, they can offer additional functionality and moneysaving on your card, so it’s worth getting to know what you’re entitled to.

Access

When you get your card, follow your card provider’s prompts to set up access to your account online. One of the keys to getting to grips with credit comes from keeping a close eye on your account, so work out how to access your account either using online banking or the card provider’s app.

Depending on the card – and the card provider – your online account and app may offer a range of handy features. These can include budgeting tools, spending trackers, card locks and spending limits. While you’re online, be sure to switch to e-statements, and make sure your contact details are up-to-date to ensure you receive statement notifications.

 

#2. Create a Spending Limit

When you’re approved for a credit card, you will be assigned a credit limit. Determined by your card provider and based on factors such as your income and ability to repay, this is the amount you can spend on your card without facing fees. However, just because you can spend up to that amount, doesn’t mean you should.

While it can be tempting to use your card all the time when you first get it, try to hold back until you get a feel for how credit suits you. Sure, you can use it in an everyday way to cover big and little purchases – as long as you keep track of your transactions carefully. You should never use your card to buy things you can’t afford.

Before you start using your card, try creating a budget. You can create a basic budget by working out how much you have coming in, and how much you have going out. You can find plenty of budgeting tools online that can help with this process. From there, you will know how much you can afford to spend within each category.

Some experts rate the 50/30/20 budget. With this budget, you put aside 50% of your income for necessities, such as rent, car running costs and food, 30% or less for items you want but perhaps don’t need, and 20% to put towards savings or paying down debt. However, you can play around with different budgeting options until you find one that works for you.

From there, set a spending limit on your card. Until you trust yourself fully with credit, you may want to set your spending limit pretty low. As you get used to using your card day-to-day and paying off all your transactions at the end of the month, you can increase your spending limit to make use of your credit card more often – while still staying within the confines of your budget.

 

#3. Avoid Impulse Spending

Depending on your inclination towards shopping, avoiding impulse spending may be the hardest part of adjusting to having a credit card. Whether you’re wandering around the shops on your lunchbreak or idly scrolling through your favourite shopping sites online, it can be all too tempting to buy this and that, and then chuck it on your card.

Impulse spending isn’t a great idea in any situation, but particularly when you have a credit card. You buy a little something here and a big something there, and before you know it, you’ve spent way more than you can pay back at the end of the month. You then have a big lump of debt sitting there, accruing interest until you can finally pay it off.

While there a number of methods you can adopt to avoid impulse buys, simply being more mindful should help you rein in your spending. When you use your card, think about whether you actually need the thing you’re about to buy. Consider waiting a few days to give yourself time to think about it, especially if the item is expensive.

Tracking your transactions provides another way to be more mindful of your spending. While some cardholders only look at their statement to find out the balance that needs to be paid, if you spend time to go through each transaction, you will have a greater awareness of how much you’re spending. This awareness could help you say no to future purchases you really don’t need.

Tracking your transactions will also help you see how your card spending is tracking within your budget. By checking in on your account regularly, you will know how much you can spend and where, which could help you make more sensible decisions as you use your card.

TIP: By taking time to check through your transactions, you can also keep an eye out for fraud. If you spot a transaction you didn’t make – and can’t explain after doing some digging on the merchant – contact your card provider to flag the transaction as potentially fraudulent. Your provider will investigate, and if needed, refund the transaction and provide you with a new card.

 

#4. Pay Your Balance in Full

When you overspend on your credit card, it becomes harder and harder to pay down your balance as the months go by.

Let’s say you overspend one month and can only cover the minimum repayment on your statement due date. From there, the bulk of your balance carries over – and starts attracting interest. You continue to use your card, adding more to the balance that will need to be paid off, all the while, each of those new transactions start accruing interest from the day they’re made.

You can see from this just how easy it would be to dig yourself into a hole of debt. Which is why it’s so important to follow rules #2 and #3. By setting a spending limit on your card and avoiding impulse spending, paying off your balance at the end of each month becomes much more achievable.

      • Why clear your balance?

          ✓ To stay on top of your spending.
          ✓ To avoid accumulating debt you can’t pay off.
          ✓ To avoid interest being applied to your balance.
          ✓ To benefit from interest free days on your purchases going forward.

 

#5. Never Miss a Repayment

Missing a repayment on your credit card is all kinds of bad news. Let us list the reasons why…

      ✕ You will pay a late payment fee.

    This could range between around $9 and $35. While it may not sound like much, those fees will add up over time. And really, wouldn’t you want that money in your pocket, not your card provider’s?

      ✕ Your credit score could take a hit.
If your repayment remains unpaid for 14 days, your card provider will report this to the credit reporting agencies. The late payment will then be recorded on your credit report, and your credit score will likely fall.

      ✕ Your debt may be passed to debt collectors.
If your repayment is more than $150, and it remains unpaid for more than 60 days, it will be recorded on your credit report as a default. This will impact your credit score substantially. Your card provider may choose to pass your debt on to debt collectors.

      ✕ You will find it harder to get approved for credit in future.
With late payments and defaults on your credit report, you may find it difficult to get approved for other forms of credit, such as personal loans and home loans, later down the line. If you are approved, you will likely pay a higher rate on your loan as a result of your ‘risky’ status.

When you receive your statement, pay particular attention to the due date. Your repayment must be made on or before this date, so set a reminder on your phone to make the transfer a few days before it’s due. Alternatively, you could set up a direct debit so that the payment is made automatically. Just make sure you have the funds in your account to cover it.

With that in mind, let’s take a quick look at some of the important stuff you’ll need to pay attention to on your statement. Aside from a list of transactions made using your card through the month, your statement will also detail your payment options. Here’s what they are and what they mean.

    • Minimum Payment: This is the minimum amount you must pay by the statement due date to stay current on your card and avoid late payment fees.
    • Closing Balance: This is the balance of your account when the statement was created, made up of all transactions made during the most recent statement period (and your carried-over balance, if applicable). You must pay this entire amount by the statement due date to avoid interest being applied.
    • Current Balance: This is the total balance owing on your account, made up of the closing balance and any transactions you have made since the statement was created. You can pay this entire amount to bring your balance to zero. This should also allow you to avoid interest being applied.
    • Custom Amount: If you want to, you can pay an amount of your choosing, as long as it’s higher than your minimum repayment. You will pay interest on the amount remaining, carried over to the following month.
TIP: You don’t have to wait until the statement due date to pay down your balance – you can make a payment towards your account whenever you want. This can be a great way to stay on top of your balance as you get used to using credit, as it allows you to avoid getting hit with a much larger balance owing when your statement arrives at the end of the month.

 

#6. Shun Cash Advances

We’ve mentioned cash advances a few times already. In short, they’re not a great idea, no matter how long you’ve had your credit card. Well then, what are they and how do they work?

Every time you use your card, your card provider processes the transaction based on the information provided by the merchant. If you use your card to buy something at the supermarket or pay for petrol, for example, those transactions will be processed as purchases. As such, they will accrue interest at your card’s purchase rate, or benefit from your card’s interest free grace period.

On the other hand, if you use your card to make a transaction classed as a cash advance, it will be processed as such. Most cards charge a cash advance fee, either in the form of a flat dollar amount, or a percentage of the sum transacted. The transaction will also start accruing interest at the card’s (typically) high cash advance rate from the day it’s made.

So, what counts as a cash advance?

    • When you use your credit card to withdraw money at the ATM.
    • When you request cash back on your card either at the checkout, or in branch.
    • When you use your card to gamble, including buying lottery tickets and scratchies.
    • When you buy ‘cash equivalent’ items, such as foreign currency.
    • When you buy or load money onto gift cards or prepaid cards.
    • When you use the card to make a bill payment under some circumstances.
    • When you use the card to make payments to individuals or billers who don’t accept credit payments (including payments made via BPAY).

Our best advice on this one? Just don’t use your credit card to make cash advances. It’s not worth the fees or the interest you will pay.

 

#7. Carry Out Regular Card Health Checks

Your needs – and your habits – as a cardholder will change over time. While you may have the perfect credit card right now, it may not suit you quite so much in a few years’ time. Your disposable income may increase. Your desire to earn rewards and take advantage of perks may grow. Your credit may improve.

Take time to carry out regular health checks on your credit card. Think about whether it’s still providing everything you need – and the value of what you’re getting from your card is more than you’re paying out in annual fees. From there, find out what cards are on the market and what they could offer you. CreditCard.com.au is the perfect place to do this.

If you find a card you like, check your credit score, check the card’s eligibility requirements and step on up the ladder.

 

Founder - Roland B Bleyer

Roland Bleyer

Founder of Creditcard.com.au. Roland has extensive knowledge about credit cards in Australia. Known as a credit card expert, he has been featured on tv and in various publications. Some popular offers on our site right now include the ANZ Low Rate. This special offer has no annual fee first year, a low purchase rate and long 0% balance transfer. Have a look also at the huge 0% for 30 months balance transfer from Citi with no balance transfer fees.

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