The idea of getting a credit card used to freak me out. It just seemed like it was too easy to borrow money and I’d inevitably end up in debt. In reality, if used properly, credit cards are a really valuable financial tool that can help you invest in life’s more expensive items, lend additional security to your payments, and even help you get a mortgage. If you’re curious to know more, this video will cover how credit cards work, the pros and cons of getting one, and how you can apply.
How does a credit card work
If you’ve never had a credit card before, there are three key things you need to consider what credit is, when do you pay it back and how to manage or even avoid paying back any interest. When you pay for something using credit, such as with a credit card, you don’t use your own money. Instead, you use funds borrowed from a bank or other provider that you have to repay at a later date. When you have to repay the money will depend on your card’s billing cycle. This tends to be a monthly cycle, but it won’t necessarily line up with the first or the last day of the month, so you’ll need to check with your provider to see when your specific billing date will be. At the end of each cycle, your bank will collect up all the transactions you’ve made and send you a bill – this is your credit card statement. Once you’ve got your statement you need to decide how you want to pay your bill. You can either pay off the entire balance, the minimum amount set by your bank, or an amount of your choice somewhere in between. Interest is a fee your bank charges for letting you borrow money. It’s calculated as a percentage of the amount you borrow, which is known as your Annual Percentage Rate or APR and will differ between cards and providers. At the very least you have to repay the minimum amount each month, after which you’ll be charged interest on the remaining balance. To avoid paying interest, you’ll want to pay off the entire balance each month. It’s worth noting that many providers will also charge an annual fee to use their credit cards.
The pros and cons
A credit card could be a great way to build your credit score. A credit score is a number that tells lenders how trustworthy you can be with their cash. In theory, the higher the score the better the borrower you are. Having a good credit score can unlock loads of benefits including lower interest rates on loans, insurance discounts, and more competitive mortgage options. Credit cards offer a convenient way to pay for expensive items and save you from carrying wads of cash around or transferring money across multiple accounts. Ideally, these items are an investment like a new washing machine or a car, as opposed to a gold-plated tea kettle or Faberge egg. Thanks to the Consumer Credit Act, credit cards also offer more protection on your payments should anything go wrong. Some cards also offer rewards, so that every time you spend you accrue air miles or points which can then be spent on treats later down the line. That being said, in the wrong hands, a credit card can be a really easy way to rack up debt. So if you’re someone who likes to splash the cash and overspend, you might want to rethink whether a credit card is right for you. Credit cards are not free money and will come with a credit limit. Some credit card providers will charge a fee for ATM withdrawals and, be aware, that even just applying for loads of cards can impact your credit score.
How to apply
There are loads of credit cards out there, so the first step is to do some research and compare which card would work best for you.
Once you’ve picked one, the next step is to apply online. It shouldn’t take more than 15-20 minutes, but be sure to answer every question honestly.
At this point, the lender will run a hard credit check, and come back to you with either a rejection or a proposed agreement which you should read carefully, sign, and return if you’re happy to proceed.
Once all the serious admin stuff is out of the way, the lender will separately send you over your card and pin.
You’ll need to activate the card before you can use it which can be done over the phone or online, depending on your provider.
The first time you use your card you’ll need to key in your pin, after which you can simply tap your card for contactless payments. And now you’re ready to go! If you’ve never had a credit card before you may only be eligible for a low credit limit. But, by using your card responsibly, you’ll build your credit score until you’re able to apply for an increase or even get a better card.
Hopefully, you now understand a little more about getting your first credit card. As always, for more in-depth information head to finder.com/uk. So, for more information, check this Banking Article/Post