A Guide to Choosing Your First Credit Card
The world of credit cards can be complicated and confusing, particularly if you’ve never taken one out before.
Well go over the basics to clue you up so that the first credit card you take out can be the perfect card for you.
How do credit cards work?
Credit cards act like short term loans, giving you financial flexibility and allowing you to make purchases that you would otherwise not be able to make given the timing of your pay cheques.
When you use a credit card, you can spend money you don’t have, and then pay off as much of the balance as possible each month, plus interest.
The Basics – Credit Limits and APR
When you come to take out a credit card, the two figures that will be quoted for each card will be the credit limit and the (representative) APR.
The credit limit is, quite simply, the amount you are allowed to borrow on your credit card. The higher the limit, the more you’ll be allowed to spend each month but also, the more you’ll have to pay back if you do, so it’s always important to strike a balance.
The APR, or annual percentage rate, is the rate at which interest is charged on the credit you use – it is essentially the cost of borrowing money from the card issuer.
The APR quoted when you see a credit card advertised is what is known as the representative rate. The actual rates you’re offered may well differ from the rates advertised depending on your credit score.
The better you credit score, the lower the APR you’ll be able to get on your credit card.
The Basics – Minimum Payments
Every credit card will have a minimum monthly repayment, amounting to a certain proportion of the money you’ve borrowed. The minimum amount will vary depending on the card you use, and will be quoted on your monthly statement.
You should, wherever possible, pay as much as you can each month as if you just stick to the minimum, then you’ll find that you’ll be paying off the balance of your card for a long time as interest continues to accrue.
Types of Credit Card
There are various different types of credit card available to suit the different needs of different customers.
Before you start looking at cards to take out, you should be absolutely clear on the exact reason why you need the card in the first place so that you can pick one accordingly.Credit Builder Cards
Credit builder cards, designed for people with poor or limited credit histories, are a popular choice for first time card holders, particular among young people.
Young people who are likely to have less experience with credit and loans are as a result, likely to have a limited credit history. Since an excellent credit rating is crucial if you want to take out the best credit cards, using a credit building card to improve yours can be a good idea.
These cards come with low credit limits and high APRs so that you can spend and pay off the balance on time without too much difficulty. By keeping up with monthly repayments regularly and promptly over time, you can watch your credit score get better and better, allowing you to take out better credit in the future.Reward Cards
If your credit rating is not an issue, and instead you want to take out a credit card that offers certain perks and rewards for money you spend.
Some of the most popular reward cards offer points redeemable on international flights for every pound you spend. Often these points can also be redeemed on upgrades on existing flights or on hotel rooms at your chosen destination.
Other reward cards will offer cash back on purchases above a certain amount.0% Interest Cards
There are also various credit cards available that come with introductory periods during which no interest is charged on purchases. As long as you make sure you pay off your balance each month, you’ll be able to spend, interest free, for a while.
It is important to bear in mind though, that when this 0% introductory period ends, the interest rates charged on these cards will be very high. It is, therefore, crucial that you shop around for a new card a few weeks before the period ends, or that you close the card account as soon as it does.
Compare all of these types of card and more online for free with Money Expert in order to see what kind of representative rates you could enjoy.