Getting your first credit card is a huge milestone — and a big adjustment. You might already have a sense of how credit cards work and how to handle a credit card responsibly, but the devil is in the details. Understanding those ins and outs before diving in will save you money and help you build up your credit more quickly.
IN THIS GUIDE
- The best credit cards aren’t for beginners
- Your first credit card can build your credit — or ruin it
- You can see the rates and fees before applying
- Credit card fees are avoidable
- Interest is completely avoidable, too
- You can — and should! — pay more than the minimum
- Paying late comes at a high cost
- Dealing with credit card fraud isn’t as difficult as it sounds
- If you’re rejected for a credit card, the issuer will tell you why
1. The best credit cards aren’t for beginners
As a newcomer to credit, you probably won’t be able to qualify for the absolute best credit cards — the ones with rich rewards and perks, big sign-up bonuses or long 0% interest periods. Those cream-of-the-crop products are available only to applicants with good or excellent credit (scores of 661+) and longer credit histories who meet certain income requirements.
You’ll likely have to start smaller with your first credit card, with a product geared toward people with limited or no credit history. It’s not all bad news, though — many types of credit cards offer decent rewards and don’t charge annual fees.
Some options to consider include:
- A student credit card, or a credit card designed for university students.
- A credit card marketed to those with average credit, generally defined as a credit score of 460 to 660.
2. Your first credit card can build your credit — or ruin it
One of the main reasons to get your first credit card is to begin building or continue to boost your credit. If you’re not careful, though, it can have the opposite effect. It all depends on what you do.
Every month, your issuer will report your credit card activity to credit bureaus — the companies that compile the credit reports that form the basis of your credit scores. In Australia, the three credit reporting bodies are Equifax, Experian and Illion (formerly Dun & Bradstreet).
The reported information includes whether your payments have been on time and how much of your available credit you’ve used. Late payments are bad. Maxing out the card is bad.
To make sure your credit card activity helps as much as possible, pay in full and on time every month and stay well below your credit limit. A good rule of thumb: Keep your balance under 30% of your available credit at all times.
You can also track your credit scores to see where you stand. You can get your free credit score through one of those credit reporting agencies, or via a provider listed on CreditSmart.org.
3. You can see the rates and fees before applying
Credit card issuers are required by federal law to publicly disclose certain terms, such as interest rates and fees, before you apply. These are displayed in a table within your issuer’s credit card member agreement or terms and conditions document. It can usually be found on a credit card’s application page online or on a slip enclosed in paper applications.
The table includes the card’s:
- Annual fee, or what it charges cardholders on a yearly basis.
- Purchase rate per annum. This is the interest rate you’ll pay on balances you carry from month to month. Some cards charge different rates on different types of balances, including purchases, balance transfers (debts moved to the card from other accounts) and cash advances (cash withdrawn with the card, usually at an ATM). Some cards, though not many, also have penalty purchase rates, which they impose after a late payment.
- Foreign transaction fees, charged when making purchases outside Australia — typically, 2% to 4% of the amount charged.
- Late fees, charged when you pay late by even a day or if you don’t pay at least the minimum amount due.
Of course, there’s some information you won’t get until after you apply. For example, in most cases, you won’t know what your credit card limit is until your application is approved.
4. Credit card fees are avoidable
It’s possible to avoid credit card fees altogether, even if you’re new to credit:
- Plenty of excellent starter cards don’t charge annual fees.
- Late fees aren’t an issue if you pay on time.
- Foreign transaction fees are irrelevant if you don’t plan on using the card to make charges outside Australia — and several issuers don’t charge foreign transaction fees anyway.
- The charges associated with balance transfers and cash advances are a moot point if you never make these types of transactions.
- Over-limit fees, imposed when you exceed your credit limit, are all but extinct. Issuers can’t charge them unless you have agreed to spend over your limit — and in that case, you’ll typically need to pay immediately or your provider could decline new transactions. You can avoid these fees by simply by staying within your limit.
5. Interest is completely avoidable, too
Speaking of avoidable expenses: Regardless of how high your credit card purchase rate is, you don’t have to pay a dime of interest as long as you pay your credit card bill in full every month. That’s because of your card’s interest-free period, which has a minimum of 25 days. Simply put, after you pay your bill in full, interest won’t start accruing on new purchases until the next due date. Pay the next month’s bill in full, and once again interest won’t accrue, assuming you’re only using your card for purchases. Keep it up, and you’ll never have an interest charge.
However, if you don’t pay your bill in full — that is, if you carry a portion of your balance over to the next month — then not only will you pay interest on that carried balance, but interest will begin accruing on new purchases immediately.
6. You can — and should! — pay more than the minimum
Credit card statements prominently display your minimum payment due, or the smallest amount you need to pay to keep your account in good standing. That can be confusing. It might read like a friendly suggestion: “You can pay the full amount, but you could also get away with paying this much smaller amount!”
In reality, paying less now generally means paying much more later. The minimum typically covers the past month’s interest and fees (if any) and only a small amount of the underlying balance. So when you pay only the minimum, you aren’t making much of a dent in your actual credit card debt. You’re mostly treading water. If you continue to make purchases on the card, that can lead to an out-of-control balance.
7. Paying late comes at a high cost
Missing your due date can get expensive quickly. Depending on how late your payment is, you could face:
- Late fees. The penalty for late payment is usually $15 to $20, costs which can add up if you continue to miss payments.
- Damage to your credit. Paying a day late won’t hurt your credit. But if the payment due is more than $150 and you pay 60 or more days late, your payment will also be recorded as late on your credit reports, negatively affecting your credit scores. Your credit card issuer must send you two notices before reporting the default. Don’t ignore those — if you’re genuinely struggling to pay, speak to your issuer about your options.
Consider setting up automatic payments from your bank account. Or, if you’re worried about overdrawing your account, note your due dates on a calendar as a reminder.
8. Dealing with credit card fraud isn’t as difficult as it sounds
If fear of fraud has made you reluctant to pull the trigger on your first credit card, understand that credit cards actually offer you more protection against fraud than debit cards do.
If crooks gain access to your debit card information, they could empty your bank account in an instant. You can report the fraud to your bank and recover your money, but that will take time to straighten out — and in the interim, you could be strapped for cash.
When your credit card information is used fraudulently:
- It’s the credit card company’s money at stake, not yours. You’ll have plenty of time to dispute any fraudulent charges and remove them from your outstanding balance, typically right away.
- You don’t have to pay. Federal law minimises your liability for unauthorised credit card purchases, and zero-liability policies of credit card networks like Visa and Mastercard generally bring your liability down to $0.
- Getting a replacement card is relatively easy. After you call your issuer to alert them about fraud on your account, they’ll cancel your card and send you a new one with a new number. No one will be able to make transactions using your old card number.
9. If you’re rejected for a credit card, the issuer will tell you why
Getting rejected for a credit card is a bummer, but you can learn from it. Card issuers are required to send you a rejection letter explaining their decision. For example, an issuer might say you were declined because your income was too low, or you lack a credit history. This feedback could help you decide how to improve your chances for approval next time you apply.
If you’re in the United States, read this article on the NerdWallet US site.