If you are about to apply for your first credit card, you may need some basic advice, so this article will provide a little information about credit cards for beginners.
You may be feeling a bit clueless regarding what to look for and what to avoid, but do not be disheartened. There are many individuals out there who have owned a credit card for ten or twenty years who still have no idea how to use them properly. So, here are the basics:
How Credit Cards Operate
Your credit card is a mini loan that you take out from the issuing bank each time you swipe it. Unlike writing a cheque or using a debit card, the money does not automatically come out of your account, but is actually borrowed from the issuer. You will then have to pay back the money within a short period, referred to as the interest free days, or you will be charged interest on the amount that you borrowed. This is where many consumers run into trouble. Instead of paying back their debt immediately, they only make a small payment which then causes them to be charged interest fees and increase their debt even if they are not spending.
The good thing about owning plastic is that you will have all of those funds available to you whenever you need it. It is kind of like taking out a line of credit at your bank, only you only pay for it if and when you actually use it. You could own a card for years and never pay a dollar in interest fees, if you managed it properly.
When it comes to convenience and security, there is really no better way to spend then on plastic. You can carry just one card, and maybe a back up, and travel all over the world. Most plastic is backed by globally accepted names like Visa, MasterCard, and American Express. You can spend in any currency and the transaction will be exchanged to Australian dollars. There are fees that apply for these foreign transactions, so be aware of them. Even if you never leave Australia, you can spend with your plastic virtually anywhere you desire.
Security is something that is taken very seriously by the financial industry. They have worked hard to develop fraud protection services that monitor your account and notify you of any suspicious charges. They also have the ability to freeze your account should you be a victim of loss or theft. These companies usually have zero liability policy that forgives charges that are deemed fraud. It is in their best interest to protect your finances and your identity and they do a good job. Ultimately though, you have to be responsible and smart to ensure that you do not fall prey to the fraudsters.
Getting And Using Your Credit Card
Choosing the right one – Choosing the right plastic can be a difficult decision. There are loads of options from all different financial institutions. They come with all different rates, benefits, and fees and are subject to different acceptance criteria. Your best bet is to think about how you will use your plastic and what features are important to you. For example, if you do not think you will use it often or only for emergencies, you might look for a no annual fee card.
You might have a higher interest rate, but if the plastic is not used you could own it for free. Those who will use their cards a lot will either want one with a low rate if they will not pay if off in full each month or a good rewards program. Whichever one you choose, make sure it continually suits your needs and that you are not spending loads of cash to own it without getting a lot of value in return. Once you have picked the one you want, you can usually apply for it online and get a response in minutes. Your card will arrive in the mail within a week or so and you can start spending as soon as it is activated.
Interest rates – Interest rates are tricky so you need to pay close attention to how much you will be charged for your transactions. To begin with, when you see an advertised rate do not assume that it is the rate you will get. They usually advertise the lowest possible interest rate, but that is only available to people with a near perfect financial history. Once you apply, you will be awarded a rate that the issuer thinks is suitable, the better your credit history is the better rate you will get.
You should also know that there are different rates charged for different transactions. You will probably have one rate for purchases, one for balance transfers, and another for cash advances.
Payments – The key to managing any plastic is making your payments on time each month. If you miss one or make a late payment, you will be hit with penalty fees and see your interest rate skyrocket. If you have a hard time remembering to make payments, you should consider doing a direct debit from your cheque account to your bill each month. That way you will never be late.
Many consumers falsely believe that they can make only the minimum payment and still manage to get their bill paid off. This is a bad plan. The minimum payment will not send much to your principle balance so it could take years to pay off even a small debt. If you cannot pay your bill in full each month then pay as much as possible and try not to carry the balance forward for too long. Remember that the only way to take advantage of the interest free period is to have paid off your bill on the previous statement.
Like most consumers, you probably want and need a credit card. There is nothing wrong with owning one as long as you understand how it works and are capable of managing it responsibly. The goal should be to only charge as much on it as you can afford to pay off at the end of each month. If you get behind, you should stop spending until you get the debt cleared, that helps to avoid getting into the debt spiral that lands so many consumers in trouble. If you can do that you can make the most of all the convenience, security, and other benefits of owning plastic without having to worry about the excessive costs.
Rule One – Compare:
If you have bad credit history, then you may be limited to the type of credit card you can apply for, but being a credit card novice does not mean you can’t become an expert researcher to locate the best card for you. Only 6% of Australians surveyed in this year’s Australian Consumer Credit Card & Banking Survey went to a credit card comparison site before making their application. Nearly 60% only applied to their own bank. And yet the most important factor in choosing a credit card was deemed to be finding the best deal. If those facts seem at odds, they are. Credit cards for beginners Rule One: Compare the market.
Rule Two – Important figures:
Assuming you are checking out the various credit cards on offer, there are certain factors that you must focus on. You may well like the colour of the credit card, and the hologram thingy, but these should not be the deciding factors. If you think that’s being facetious, bear in mind that in that same survey mentioned above, 14% thought credit card colour and branding was important.
- Interest rates – This is the rate that will be applied to your account if you fail to clear your balance in full each month. This is not exactly the same as the APR (which includes any associated fees broken down over a year), but for all intents and purposes, you can count these as the same. Typically, rates range from 11% to 20%, where the lower figure is obviously best.
- Annual fees – Australian credit cards usually carry an annual account maintenance fee, although there are some offers that waive this. $30 to $60 would not be unusual for a regular credit card, but you need to make sure the lower fee is not to compensate for a much higher APR. Which option you choose will depend on whether you honestly believe that you will be able to pay off your balance in full each month. If so, the interest rate won’t matter, so a low or zero annual fee would be preferable.
There will be other figures to baffle you, such as special introductory offers and balance transfer deals, but the key points for a novice are the two listed above. You will also see rewards schemes offered. If they add to the deal, great. If you have to compromise to get them, or pay an extra fee, then you’re focusing on the wrong things. Credit cards for beginners rule two: Cut to the chase; realise what matters most.
Rule Three – Be sensible:
This is the rule that many veteran credit card holders break. They overspend. This is the surest way to create a big debt, and accumulate interest. Keep an eye on your spending and make sure you are always able to clear your balance at the end of every month. Credit cards for beginners rule three: Budget, know your limits, and stay within them.