Tips and watch outs for choosing your first credit card
What’s the worst that could happen? Er… fees, interest, debt spirals?
There are lots of different types of credit card available. So once you’ve decided to get a credit card, choosing which one to get can be the hard part. Especially if you’ve never had a credit card before.
Here, we’ll give you some tips on what to look out for and some things to looks out for to avoid some of the pitfalls of credit cards.
When choosing a credit card, a helpful place to start is thinking about what you plan to use the card for
Types of card.
Some cards are designed with particular features for particular uses. When used properly, and only for their best features, some of these cards can actually cost the card provider money.
Improving your credit score.
There are credit cards specifically designed to help with this. They tend to have lower credit limits (i.e. the amount you can spend on the card each month) and higher interest. The credit limit can be what tempts the newbie to spend more than they can afford. Starting off with a low credit limit, reduces the disaster of a worst possible case scenario.
So, some things you may want to look out for when choosing:
Interest. This represents most, but not always all of the cost of the card. If you don’t have a credit history, you’re normally seen as riskier to the credit card provider so the cost to borrow (interest) is higher for first-time credit products. So when comparing cards, you might be interested in getting the lowest APR. This is especially important if you’re going to use the card in a way where you can’t afford to pay it off completely at each bill. (Payment becomes due at the end of the following month — so any spending done in January will be due for payment by the end of February. This means you have just under two months to pay off the spending at the beginning of each bill cycle and a minimum of a month for any spending done at the end of the cycle).
APR? What is APR?
APR stands for Annual Percentage Rate and is the % interest you would pay on your spending + any additional fees for the card added on. It has nothing to do with April. Nothing at all.
Control. Staying in control of your spending and paying off your balance each month is key to improving your credit score with a credit builder card. So, you might want to look at what other features the card offers to help you stay on top of things. For example, tracking your spending online or in an app, setting up direct debits for payments and getting alerts when things are due can all help with this.
If you’re looking for a credit card to use when travelling
There’s a range of credit cards specifically designed for spending abroad. They can help you avoid expensive exchange rates and fees for spending abroad that can come with other credit / debit cards.
When choosing a credit card for travel, you might want to look out for one with no foreign transaction fees. What’s a foreign transaction fee? It’s a 3% fee lots of credit / debit cards charge for spending abroad.
If you want to use the card for borrowing
If you’re borrowing on a credit card, i.e. not paying off what you’ve spent each month, you will pay interest. So when comparing cards, you might be most interested in getting the lowest APR.
Be careful though — credit cards can be an expensive way to borrow money. The interest on personal loans can be cheaper.
If you do borrow on a credit card and only do only pay the minimum monthly payment, it’ll take a lot longer to pay off and you’ll end up paying more as the interest mounts. This can lead to problems in the long term, so it’s important to plan carefully and borrow within your ability to pay back. This may well be lower than your credit limit. Just because you have a credit limit set at £2000, for example, it does not mean that the bank has worked out that you can afford to immediately max it out and everything will be all right. It is your responsibility to work this out. Though some banks are more helpful and transparent than others, while some have business models that are based on high fees for late payments and kicking you when you’re down. Avoid these if you’re new to credit.
Comparison sites can be a great way to compare lots of products easily
Comparison sites give you a summary box of key info for each product, which are easy to compare with each other.
Credit card companies pay to have their cards listed on comparison sites though. This means they don’t tend to contain all the products on the market. So it can be good to bolster comparison site research with some other googling and forum reading.
Comparison sites can also enable you to check your likelihood to be accepted for a card. So you choose a product that’s better suited to your circumstances and you can apply with a little more certainty about whether you’ll be accepted or not. This is important because applying for a product and not getting accepted can have a negative impact on your credit score. Google the term ‘eligibility checker’ and you’ll find free online tools.
Be careful of hidden fees and introductory offers
One you know what card / cards you’re interested in, it can be good to read the T&Cs to understand any additional fees you could be hit with. For example, late payment fees, foreign transaction fees, fees for going over your limit.
Also, some credit cards offer good introductory offers, but with rates that only stick around for 6–18 months, depending on the card. A look over the T&Cs can help you understand what the standard rate will be once the introductory time is up.
This way, you can weigh up the card against others with better knowledge about the cost across the total product lifetime.
