How do you know which credit card you want if you've never done it before? We talk through the jargon and give some tips on how to maximise your chances of being accepted.
Credit cards can be a double-edged sword. On the one hand, they let you spread the cost of things you want even if you don't have money up front. And they can also help you build up your credit score. However, if you don't use your card wisely, it can be a costly way to borrow.
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.
Comparing the interest rate (APR)
The APR (Annual Percentage Rate) is a credit card’s yearly interest rate plus any other fees associated with the card. It's the law for lenders to show an APR when they advertise a credit product - and since it's calculated in the same way by every company, it makes it easier to compare credit cards across the board.
Here's how APR is charged. 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 don't think you'll be able pay off to your full 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.
Generally speaking the better your credit score, the cheaper the APR you'll be offered.
Your credit limit is the amount of money you can spend on the card. Those with higher 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 is the smallest amount due every month on your card. It’s usually calculated as a percentage of what you owe or a set 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 ClearScore) for free. If you're 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 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.
Here's 4 handy pieces of advice to consider when you're applying for a new credit card
1: Check your credit score and report before you apply
Before you apply for credit, it's always worth checking your credit score and report as it can 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.
Make sure you check your credit report thoroughly (here's a cheatsheet on what to look out for) to make sure your data is accurate and complete as this could hinder your credit score.
You can check your credit report and score for free through ClearScore, as many times as you like - and it will never affect your credit score.
2: Check your eligibility
Whenever you apply for credit, a hard search is carried out on your credit report and a mark is left. If you make too many applications for credit in a short space of time, this can damage your credit score and make it harder for you to be accepted for credit.
One way to avoid this is to check your eligibility before you apply. You can do this through a 'soft search' - which mens a lender can see limited information about you but doesn't check your full credit report. Then you will see a percentage of how likely you are to be accepted for the product. The crucial thing is that soft searches don’t harm your credit score, so you can check your eligibility as many times as you want.
You'll notice in your ClearScore 'Offers' section of your account we show you your eligibility score on a range of products including credit cards.
3: How to approach credit if you've got no credit history
If you haven't used credit much before you may have a 'limited' credit history - aka a ‘thin file’. This could mean you have fewer credit card options available to you. 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.
If you're struggling for credit, you could think about applying for a credit card with the bank you use for your current account, as they may 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 up 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 long term but only if you want to build your credit score carefully.
4: Get into good credit card habits
Once you begin using your credit card, you’re taking your first step on the financial ladder. By making payments on time, you'll be able to build up your creditworthiness and improve your credit score. This will be invaluable later on if you need to borrow more credit, such as a mortgage or a loan, and can increase your access to better interest rates.
It's 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.
*This is a simplified example.