Getting a credit card is a big step, and if used correctly it’s a very useful tool for managing your finances whatever your circumstances.
That said, you shouldn’t go ahead with signing up for your first credit card, let alone taking out a second or even a third one, without understanding the answers to all of the following basic questions.
What are interest rates?
Interest isn’t just something that applies to things like personal loans and mortgages. With a credit card, you’ll be charged interest based on the proportion of your available balance you’ve yet to pay down when each month comes to an end.
The higher the rate of interest, the more it will cost you to use a credit card, but only if you don’t pay all of it off month by month.
This can have a compounding effect over time, so seeking out a deal that’s got a low rate applied to it, and aiming to pay off as much of the balance as possible within a given period, is sensible, particularly if you’re on a budget.
What are the major credit card companies?
There are lots of providers and brands out there in this marketplace, but for newcomers it’s best to work with the largest credit card companies rather than getting into the niche end of the spectrum straight away.
Big names like Citi, Chase, American Express, Capital One, Bank of America and Discover all have good track records of serving users.
Your existing bank will almost certainly have credit card products to consider, for example. However, better deals might be offered by rivals, as an incentive to bring new customers onboard, so don’t just limit yourself to brands of which you’re already a customer.
What fees apply?
Another fundamental aspect of credit card use are the fees and charges that are levied against you, either by the provider itself or by third parties that process transactions you make with your card.
For instance, you may be charged a flat monthly or annual fee by your provider depending on the type of card deal you choose, in order to access perks that it affords you.
Likewise you could face additional charges when using your credit card for certain things, such as paying for goods online or withdrawing cash from an ATM. Read the small print and know what extras you’ll pay before you sign up.
What is a balance transfer?
If you’ve already got a credit card and you want to switch to a different one, many providers will let you transfer any outstanding balance across from one card to the next.
This sounds good, and is certainly convenient, but usually comes with a fee based on a percentage of the total balance owed.
Zero percent balance transfer deals are available, so look out for these if you want to make savings when you switch.
What is a minimum payment?
All credit cards come with a minimum repayment that you’re expected to make each month. It’s possible to just stick to this lower limit and avoid any penalties, but it’s not the wisest move, as you’ll still be left with a large balance that doesn’t really get diminished over time.
What happens if I miss a credit card payment?
If you don’t make the minimum repayment each month within the allotted window, you’ll likely be hit with a late payment fee by your provider.
Worse yet, you will also face the likelihood that your credit score will take a hit, which in turn means that you will struggle to achieve eligibility for other financial products in the future.
Why should I use a credit card?
People use a credit card for all sorts of reasons, but one of the most noteworthy advantages is that by using it regularly and paying off the balance consistently, you’ll be building good credit as you go.
Bear in mind that not having a credit history is just as much of an issue as having bad credit, so you’ve got to start somewhere. Responsible use of a credit card represents a simple way to go about this.
Another perk with paying on a credit card rather than a debit card is that you have additional fraud protection measures in place. So even if you buy something online that turns out to be a scam, or your card details are stolen to be used for unauthorized purchases, claiming back the cash is straightforward.
Final thoughts
For the most part, it’s only advisable to have a single credit card in your wallet, and to pay it off promptly. It’s useful for everyday purchases and one-off emergencies, but shouldn’t be a crutch that props up your finances in the long term.
