How do you know which credit card you want if you've never done it before? Read our guide to choosing your first credit card.
We often get asked how you should choose your first credit card.
Most of us are aware that having a credit card helps build your credit profile, which can be useful for getting all types of credit, including mobile phone contracts and getting a mortgage. But with all the different credit cards out there, how do you choose the right one?
The terms you need to know
The first step in choosing the right credit card is to understand what all the jargon means.
Cards are usually advertised by their APR rates, introductory offers and rewards. Understanding and comparing these can help you in your quest for the right one.
The APR (Annual Percentage Rate) is a credit card’s yearly interest rate plus any other fees associated with the card. Because it includes other fees as well as the interest rate, it’s a good way of comparing credit cards.
For example, an APR of 15% means that if you carry a debt of £1000, over one year you will pay back approximately £150 more than the amount you borrowed*.
Generally, the lower the APR, the better. However, if you’re planning on paying your balance in full every month, you don’t need to be too concerned with the APR as you won’t be charged any interest.
If you aren’t planning on paying your balance off every month, the Money Advice Service has a credit card calculator that you can use to calculate how much interest you will have to pay depending on your monthly repayments. It also shows you how long it will take to pay off the balance.
Most people (at least 51%) are offered the advertised APR for a credit card, but credit card companies can offer you a different APR based on your credit history.
Having a poor credit score can mean you will be charged a higher rate. However, if you pay off your balance in full every month, you won’t be charged any interest.
Your credit limit is the amount of money you can spend on the card. Those with high credit scores are often given higher limits as they have proven they can pay back their balance. If you have a lower credit score, it’s likely you’ll be given a lower credit limit. If you reach your credit limit too often it could affect your credit score as it will appear to lenders as though you rely too much on credit.
The minimum payment on a card means the smallest amount due every month on your card. It’s usually calculated as a percentage of what you owe or a cash amount - whichever is larger. It also includes any interest due for the month, any charges for a missed payment and possibly part of the annual fee if there is one. Check your card for the specific terms relating to the minimum payment. As your debt balance gets smaller, so will your minimum payment, meaning the time taken to pay off your debts will increase. Therefore, it’s a good idea to pay more than the minimum amount each month. The more you pay off each month, the less interest you will accumulate and the quicker you will pay off your debt.
Credit cards often charge fees for late payments, going over your credit limit, withdrawing cash, using your card abroad and for balance transfers. Make sure you know what the fees are for a specific card so you’re not caught out. To avoid late payment fees, set up a direct debit to pay your balance in full every month.
Cards often use introductory offers to entice consumers. They can be in the form of low interest rates, cash back or other rewards such as air miles.
A common introductory offer is 0% purchase cards, which charge you no interest to borrow money for the stated time period (some cards offer 0% for up to 27 months).
These are usually reserved for those with sufficient credit histories, so check your eligibility first (you can do this through a free service like ClearScore). If you are lucky enough to be eligible, they can be a good option if you won’t be able to pay back your full balance within a month. If you do use a 0% purchase card, be sure to pay your balance in full by the time the offer ends so you’re not hit with high levels of interest.
Many cards offer rewards to their users, such as cashback, loyalty points or air miles. For example, an M&S credit card might offer M&S Points, and various credit cards offer Avios points, which can be spent on flights or other travel such as the Eurostar.
Be aware, reward cards can encourage spending and usually charge high interest rates. If you choose a reward card, it's usually a good idea to repay your balance in full every month to avoid paying this high interest. If there is no ‘repay in full’ option on your direct debit form, write ‘pay in full’ and call to check that your bank has understood.
If you don’t plan on paying your balance in full every month, it might make sense to choose a card with a low APR rate, not one based on its rewards.
Applying for a card
Now you’re clued up on credit cards, the next step is to apply for one.
Some lenders will show your eligibility by using a ‘quotation’ or soft search. Soft searches doesn’t harm your credit score, but gives lenders (and you) an idea of whether you'd be eligible.
ClearScore shows your eligibility for products on the 'Offers' page of your account.
Check your credit score and report
To better understand your chance of being accepted, check your credit score before applying for a card. You can do this through a free service like ClearScore.
Checking your credit score and report will allow you to see how you look in the eyes of a lender, and give you the chance to make any improvements to your report before you apply. This way, you can increase your chances of being accepted for credit and at a lower interest rate.
Limited credit history?
If you have a limited credit history or a ‘thin file’, you may have fewer credit card options. This is because lenders don’t have any proof that you will pay back what you owe so might be more hesitant to lend to you.
One option could be applying for a credit card with the bank you use for your current account, as they can access your financial history so could be more willing to lend to you.
Another option is to apply for a credit builder card. These often have high APRs (some up to 30%) and low credit limits, but can be used carefully to build your credit score. By using your credit card to pay a bill or a small amount each month, and setting up a direct debit to pay it back in full, you can steadily increase your credit score.
If you're a student, some banks offer specific credit cards for you. Natwest and the Royal Bank of Scotland, for example, offer credit cards as part of their student current accounts. These also tend to have high interest rates, so it is best not to use them to borrow, and only if you want to build your credit history carefully.
Good credit card habits
Once you begin using your credit card, you’ve taken your first step on the financial ladder. By making payments on time, you will begin to build your creditworthiness and improve your credit score. This will be invaluable later on if you need to borrow more money, such as a mortgage or a loan, and can increase your access to better rates.
It is important to get into good habits when you use a credit card. If you’re using a card with a high APR and don’t pay off your balance each month, the interest could spiral very quickly. Furthermore, try not to use your credit card for cash withdrawals, as you will be charged a fee.
Lenders make money from interest and fees, so make sure you keep on top of your finances and don’t end up paying more than you intended. Credit cards can be useful tools, but only if they are used with caution and responsibility.
*This is a simplified example.