Getting your first credit card
For some, getting a credit card is a right of passage. For others, it’s a financial necessity. But, no matter how you feel about it, getting your first credit card is a pretty big deal. With that piece of plastic in your hand, you can buy pretty much anything you want – as far as your credit limit allows, anyway. That kind of power can be difficult adjusting to, and it can lead to mistakes.
Which is why it’s a good idea to find out as much as you can about how credit cards work before you apply. With the right knowledge at hand, you can make better choices. You will know why you need to avoid the temptation of overspending, why you need to pay off your balance each month, and why you need to make your repayments on time, every time.
We aren’t taught enough about credit cards (or money in general) when we’re at school. It can feel like credit card money comes from a bottomless well of funds unless someone explains how credit works. Flying blind in the world of money can cause costly mistakes, some of them serious (and not something mum and dad can easily fix).Before you apply for any kind of credit (which is when you borrow money of any kind, like a home loan, personal loan, or a line of credit with a credit card), you should educate yourself. We’ve made it easy with these top 7 must-know tips for first timers.
We’ll give you a rundown on the essentials within this guide to get you started and on the right track.
Credit Card Basics
Let’s start at the beginning. How does a credit card work? When you apply for a credit card, your card provider will allocate you a spending limit (known as a credit limit). You can spend up to this amount, but not over it or you’ll get hit with fees. Instead, aim to only use your card to pay for stuff you know you can pay back within the month.
At the end of each month, you’ll receive a statement showing what you’ve spent and where (you can also track this using your card provider’s app). This statement will provide you with your overall balance and the payment due date. While you are required to make at least the minimum payment by the due date (or again, you will be charged a fee), it’s always better to pay off your balance if you can.
Doing this should help you to avoid interest accruing on your balance. Most cards offer a certain number of days interest free on purchases, but only when you clear your balance the previous month. If you don’t, interest will start stacking up on both your carried-over balance, and any new spending as well.
What Happens When You Apply
Once you’ve compared your options – and you understand exactly what you need from your card – it’s time to apply. So, what happens next? After checking that you meet the card’s eligibility requirements, you can apply for the card online. The card provider will ask you to provide certain details regarding your employment, your income, your assets and your liabilities. Bear in mind, you may have to provide documentation to back this info up.
From there, the card provider will check your credit file to assess your credit worthiness. Then, as long as you meet all the approval criteria, your application should be approved. Your card provider will give you important documentation to read, including your card’s PDS (product disclosure statement), and your card will arrive in the post within one to two weeks. After that, it’s simply a matter of activating your card to get started.
What Happens Next
Now it’s up to you to be smart with your card. You can use it to buy stuff online and in person. You can even use it to withdraw cash at an ATM (this is called a cash advance, and it’s not recommended due to the fees and high interest involved). If your card allows for it, you can sync your card with your device using Apple Pay, Samsung Pay or Google Pay, providing even more usability.
What’s the best type of credit card for a first-time user?
If you’re new to the world of credit, it’s a good idea to start with a basic card, and then move on to a card with more complex features later on down the line. Basic cards tend to have low annual fees and low interest rates, making them less of a risk if you happen to overspend. And, while they generally have fewer features than their high annual fee, high interest cousins, they do still offer the basics, while most importantly, providing you access to credit.
How do you compare credit cards for first-timers?
What should you look for when you compare credit cards? Well, as a first-timer, here are the most important factors to keep in mind.
Annual Fees: You will pay an annual fee for the use of your card, typically on the anniversary of your card approval. As a first-time card user, look for a card with a low annual fee, or even better, with no annual fee at all. While these cards are generally basic, they help keep costs down as you get to grips with accessing credit.
Interest: Your card will have a purchase rate, which will be applied to purchases, and a cash advance rate, which will be applied to cash advances (ATM withdrawals, foreign currency and gift card purchases, gambling transactions and more). Opt for a card with a low rate on both, if possible. This should keep your interest costs as low as possible if you are unable to clear your balance at the end of the month.
Interest-free Days: Most credit cards offer a number of interest-free days on purchases (usually up to 44 or 55 days). As long as you pay off your balance each month by the due date, you can take advantage of these interest-free days to help you keep costs down.
Eligibility: Not all credit cards are suited to first-time users. Premium cards for example, such as platinum and black cards, tend to require excellent credit history and a high minimum income. You do not want to have your application denied, as this will be recorded on your credit file and may negatively affect your credit score. Instead, look for simpler, low cost cards with more flexible eligibility requirements.
Features: Let’s be clear, features are not your first priority on a first credit card. While plenty of enticing features are out there, they tend to come at a higher cost. If you look at rewards, for example, these encourage you to spend. Unless you have the funds to pay off that spending, you will likely carry a balance, and then pay interest that will negate the value of any rewards earned.
What should you look for in a first-time credit card?
So, you’ve got a few credit cards on your shortlist. How do you narrow that list to just one card?
Low Cost: Take a look at how much you’ll pay in annual fees, and any other fees that may apply, such as foreign currency transaction fees. Pay attention to the card’s purchase rate as well, to then opt for the card with a low ongoing annual fee and interest rate.
Account Access: As you get to grips with using your credit card, it’s a good idea to keep a close eye on how you’re tracking. That means choosing a card with a good app. Instead of relying on your statement to arrive at the end of the month to see how much you’ve spent, check your account via the app every few days. Know that you don’t need to wait until the statement is due to pay off your balance, you can pay off little bits at a time or clear it completely any time you like.
Essential Features: Fancy features and rewards are out – for now. But, that’s not to say you can’t check out what features are available. Visa and Mastercard both offer a number of extras, which aren’t always advertised by the card provider. It’s worth checking your issuer’s website to find out what extras you could be eligible for as a cardholder.
Flexible Eligibility: To avoid getting your application denied, you will need to check your card’s eligibility requirements carefully. That means reading the small print. As a first-timer, opt for a card with flexible eligibility requirements – and if you’re unsure, contact the card provider to ask for more info.
What should you avoid?
Knowing what to avoid is just as important as knowing what to aim for as a first-time cardholder.
Premium Cards: These will typically require an excellent credit history and a high annual income. Unless you have these under your belt, premium options such as platinum and black cards are usually best avoided by first-timers. Aside from the eligibility side of it, these cards also feature extensive fine print, which may be harder to understand if you’ve never used a credit card before.
Complex Features: Again with the small print. If you want to get the most out of your card, you need to know how its features work. While it’s not impossible for a first-time cardholder to get their head around complex features, it will take more effort being a credit card newbie.
Rewards: Rewards cards reward spending. Until you get used to only spending what you can afford to pay back each month, rewards are usually best avoided as they encourage spending month to month.
Introductory Offers: While some intro offers can be handy to have as a first-timer – for example, reduced annual fees or a 0% purchase offer – they shouldn’t be the sole reason to choose a card. If the card is solid – and the offer is too – go for it, but if the offer only serves to entice you to apply for a card that doesn’t suit your needs, it’s best to walk away.
💡 7 Must-Know Tips For Your First Credit Card
Tip #1. Being given credit is not an invitation to start spending 💸
When you apply for a credit card, your card provider will assign you a credit limit. This limit will be based on a number of factors, including your credit history, your employment status and your income. For most first-time credit cardholders with limited credit history, their credit limit will typically be quite low, ranging from $500 to $1,000.
Regardless of how high or low that limit is, it’s important to remember that just because it’s there, doesn’t mean you have to spend it. When we first get a credit card, that notion of having ‘free money’ often encourages us to spend, giving us permission to spend even if we know we can’t pay it all back. However, this can lead to some serious problems if spending keeps stacking up.
Tip #2. Different cards 💳 suit different cardholders
One thing many first-time cardholders are drawn to is rewards. In an ideal world, rewards cards would work for everyone. They would let you earn heaps of incredible rewards simply for spending on your card. In the real world, however, rewards don’t come for free – and they don’t usually suit smaller spenders.
With a rewards card, you will pay an annual fee. If this annual fee is $90, you would have to earn rewards worth more than $90 each year just to make it worth your while. If your card provides rewards equal to 1% of your spending, your annual spend would need to be $9,000 just to break even. And, if you ever carry a balance on your card and pay interest, you would have to work even harder to see any value from your rewards.
Ones that could fit the first-timer bucket are:
Low Interest Credit Cards: With a low purchase rate, these cards can make it easier if you overspend and need some time to pay off your balance.
No Annual Fee Credit Cards: With< no annual fee, this type of card can sit in your wallet until you’re ready to use it. You don’t have to pay to keep it there, and it can help you get the hang of credit while keeping features simple. Take note of the purchase rate on these cards, however, as they it may be higher than you’d expect.
Low Income Credit Cards: These cards have a lower minimum income requirementmaking it easier for first-time applicants with a lower income to apply. With a lower income requirement comes a lower credit limit. These cards also usually have a low rate or low fee.
Student Credit Cards: Geared specifically towards students, these cards can be easier for students to get approved for, even with a lower income and minimal credit history. Be aware of higher purchase rates, even if annual fees are low.
Tip #3. You can use your credit card 📈 to build your credit
Applying for a credit card – and using it responsibly – can help you to build your credit score. If you have a credit card, your credit score will be positively affected if each month you make repayments on time. According to Experian, one of Australia’s three main credit reporting bureaus, payment history is one of the top factors in most credit scoring models and accounts for 35% of a credit score (2).
Other ways to improve your credit include limiting your credit applications (as numerous credit applications can be an indicator of financial stress), and reducing your credit card limits. Why? If you have a number of credit cards with high limits, it increases your potential for risk. With all that spare credit, lenders see that you could spend up to those limits and get into trouble financially.
Tip #4. Cash advances 🚫 are not the same as debit card withdrawals
While it may look similar, withdrawing money on a credit card is not the same as accessing money from your current account using your debit card. As the name suggests, a ‘cash advance’ provides you an advance in cash. Just as a purchase on your credit card advances you credit, cash withdrawn on your card provides access to money that is not actually yours. It’s your lender’s.
It’s best to avoid cash advances whenever possible. Just pretend the feature doesn’t exist.
Tip #5. You can avoid 🥳 fees and costs by making smart decisions
If you have looked at credit cards online, you may soon find your social media feed clogged with credit card ads, most likely unsuited to your needs. These ads show feature-packed cards with enticing introductory offers, which usually have high annual fees and interest. But, what you may not know as a first-time cardholder is that credit cards don’t have to be expensive.
By being a responsible, smart credit card user and not paying interest or
fees and choosing the right card, you could access credit for free.
Tip #6. Don’t just make the minimum payment 🙅♀️
On your credit card statement, it will tell you what your minimum payment is. This is the minimum payment you must make to avoid getting a late payment fee or a default on your account. Varying according to the card provider, the minimum payment will either be a fixed amount, such as $20, or a percentage of the balance, which is usually 2-3%.
To make it easier to remember, you could set up auto-pay so you never have to worry about missing a payment. This could be arranged for the day after your payday, so you know the money will be ready in your account.
Tip #7. A balance transfer offer is not a ‘clean slate’ 🧹
Balance transfer offers are common in the credit card world, but they should not be thought of as a ‘get out of jail free card’. Used correctly, a balance transfer offer can be used as a tool to pay down debt. But, that doesn’t mean you should overspend on your current card because you think you can clean up the mess with a balance transfer afterwards.
Sources: 2. https://www.abc.net.au/news/2019-05-03/your-credit-score-reflects-your-financial-behaviour/10987788
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