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7 Must-Know Tips For Your First Credit Card

We aren’t taught enough about credit cards (or money in general) when we’re at school. It can feel like credit card money comes from a bottomless well of funds unless someone explains how credit works. Flying blind in the world of money can cause costly mistakes, some of them serious (and not something mum and dad can easily fix).

Before you apply for any credit (that is, when you borrow money of any kind, such as a home loan, personal loan, or line of credit with a credit card), you should educate yourself. Vincent Vittoz has made it easy with these top 7 must-know tips for first timers.

1. Being Given Credit Is Not an Invitation To Start Spending

When you apply for a credit card, your card provider will assign you a credit limit. This limit will be based on a number of factors, including your credit history, your employment status and your income. For most first-time credit cardholders with limited credit history, their credit limit will typically be quite low, ranging from $500 to $1,000.

Regardless of how high or low that limit is, it’s important to remember that just because it’s there, doesn’t mean you have to spend it. When we first get a credit card, that notion of having ‘free money’ often encourages us to spend, giving us permission to spend even if we know we can’t pay it all back. However, this can lead to some serious problems if spending keeps stacking up.

Instead of thinking of your credit limit as ‘free money’, consider each purchase before you make it. Unless you know you can pay off those purchases at the end of the month, don’t make them. So, put that that MAC lipstick back on the shelf and remove that PS4 game from your cart. If you don’t have the money to cover it, your credit card should stay firmly in your wallet.

If you’re having trouble with overspending, a spend tracker app could help. Using this in conjunction with your banking app, you’ll be able to track your spending while keeping tabs on how much you have available to spend. You could also create a budget so you know exactly how much you can afford to spend on extras, letting you splurge when you can afford it.

2. Different Cards Suit Different Cardholders

Some credit cards are more exciting than others. While some simply offer access to credit, others offer the opportunity to earn rewards while accessing enticing features such as airport lounge passes, VIP event invitations and hotel stays. You want the more exciting option, right? Unfortunately, while they may seem appealing, these higher end cards don’t typically suit first-time cardholders.

One thing many first-time cardholders are drawn to is rewards. In an ideal world, rewards cards would work for everyone. They would let you earn heaps of incredible rewards simply for spending on your card. In the real world, however, rewards don’t come for free – and they don’t usually suit smaller spenders.

With a rewards card, you will pay an annual fee. If this annual fee is $90, you would have to earn rewards worth more than $90 each year just to make it worth your while. If your card provides rewards equal to 1% of your spending, your annual spend would need to be $9,000 just to break even. And, if you ever carry a balance on your card and pay interest, you would have to work even harder to see any value from your rewards.

Rewards cards tend to work best for cardholders who channel a large spend through their card, and then pay it all off at the end of each month. As a first-time cardholder, it might take some time before you are able to do that, so in the meantime, it would be best to stick to a simple, no frills card that helps you keep costs down.

3. You Can Use Your Credit Card to Build Your Credit

According to a survey (1) released last year by consumer education website CreditSmart, many young Australians are unsure about credit reporting and how it affects them. The survey showed that 44% of millennials are unsure of the difference between a credit score and a credit report, and more than half are unaware of what a lender looks for in a credit report.

While it may not affect them too much in the short term, this lack of understanding could cause problems later on down the line. Someone who doesn’t understand credit reporting may make no effort to build their credit over time, or worse, may make mistakes that cause them to have bad credit, making it difficult to get approved for a car loan or mortgage when they’re older.

Applying for a credit card – and using it responsibly – can help you to build your credit score. If you have a credit card, your credit score will be positively affected if each month you make repayments on time. According to Experian, one of Australia’s three main credit reporting bureaus, payment history is one of the top factors in most credit scoring models and accounts for 35% of a credit score (2).

Other ways to improve your credit include limiting your credit applications (as numerous credit applications can be an indicator of financial stress), and reducing your credit card limits. Why? If you have a number of credit cards with high limits, it increases your potential for risk. With all that spare credit, lenders see that you could spend up to those limits and get into trouble financially.

In terms of managing your credit score, you should regularly review your credit history to make sure everything in your credit file is accurate and up to date. You can apply to have errors corrected with the appropriate credit reporting agency. Managing your debt wisely can also help you maintain your credit, preventing you from getting over your head and missing repayments.

How bad is bad credit? A default will stay on your credit report for five years, while a late payment will stay on your credit report for two years. The more late payments on your credit report, the more your credit score will drop. Even declined credit applications take their toll. This is especially important to remember for first-time cardholders.

When you turn 18, you will likely start receiving invitations to apply for all sorts of credit cards by your bank, and in some cases, other lenders. These invitations may make it seem like you are already approved, and all you need to do is fill in a few details to apply. However, you still need to meet the eligibility requirements of the application. If you don’t, your application will likely be declined, and this will be recorded on your credit file.

The good news is that the negative items on your credit file will disappear over time. If you make a mistake, you can try to balance it with responsible behavior. Making your credit card payments on time, paying off your balance in full and being smart with your spending will help you Job Search over time, making it easier to get approved for big ticket credit applications, such as future mortgages.

4. Cash Advances Are Not the Same As Debit Card Withdrawals

While it may look similar, withdrawing money on a credit card is not the same as accessing money from your current account using your debit card. As the name suggests, a ‘cash advance’ provides you an advance in cash. Just as a purchase on your credit card advances you credit, cash withdrawn on your card provides access to money that is not actually yours. It’s your lender’s.

5. You Can Avoid Fees and Costs by Making Smart Decisions

Aside from receiving invitations to apply for credit cards through the post, you may find temptation to apply elsewhere as well. Credit card providers may set up shop at college and university orientation weeks, offering sign-up bonuses such as t-shirts, pens and hats to unsuspecting students starting their journey into tertiary education.

If you have looked at credit cards online, you may soon find your social media feed clogged with credit card ads, most likely unsuited to your needs. These ads show feature-packed cards with enticing introductory offers, which usually have high annual fees and interest. But, what you may not know as a first-time cardholder is that credit cards don’t have to be expensive.

6. Don’t Just Make the Minimum Payment

On your credit card statement, it will tell you what your minimum payment is. This is the minimum payment you must make to avoid getting a late payment fee or a default on your account. Varying according to the card provider, the minimum payment will either be a fixed amount, such as $20, or a percentage of the balance, which is usually 2-3%.

Changes to the way statements are provided now mean that card providers need to tell you how much it would cost in interest and how long it would take to pay off your current balance if you were only to make the minimum payment. By taking time to check that out, you will see why it’s not a good idea to only pay the minimum.

Sometimes, just paying the minimum can incur hundreds or even thousands of dollars in interest, leaving the cardholder in debt for years, or even decades. While knows it's not always possible to pay off your balance in full, try to pay as much as you can, then pay off everything the following month.

To make it easier to remember, you could set up auto-pay so you never have to worry about missing a payment. This could be arranged for the day after your payday, so you know the money will be ready in your account.

7. A balance Transfer Offer Is Not A ‘Clean Slate’

Balance transfer offers are common in the credit card world, but they should not be thought of as a ‘get out of jail free card’ that allows you to be irresponsible with your spending. Used correctly, a balance transfer offer can be used as a tool to pay down debt. But, that doesn’t mean you should overspend on your current card because you think you can clean up the mess with a balance transfer afterwards.


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