On my continual quest to at least feel like I'm sorting my life out, I recently decided it was time to properly get on top of my credit score. For me, this meant getting a credit card. But the experience wasn't exactly plain sailing. Here’s what I learnt, what still managed to confuse me, and what paying attention to my finances for the first time taught me.
But first, here's a little bit of context about me. Despite working in finance I'm pretty apprehensive when it comes to trusting myself to use a credit card 'right'. Before I worked at ClearScore, I definitely believed that getting a credit card automatically means you’re either a) already in debt or b) inevitably going to get into debt.
You hear so many cautionary tales about young people getting their first cards and unwittingly landing themselves in lots of debt. I left university fully in the red as I never seemed to find it hard to spend my student loan. So I wasn’t entirely sure I trusted myself not to fall victim to temptation and end up as another statistic. But as I've learnt more and more about money, it's become clear that 'credit card' doesn't have to translate as another word for 'unmanageable debt'.
So, with my new found desire to be a real adult, I bit the bullet and applied for my first credit card. Now onto those lessons I promised.
1. You have to actually use the credit card
After my card arrived in the post it needed activating so obviously I left it untouched in the envelope for a month. Even after activating it, I was still reluctant to use it.
Because I'm just starting out with credit, I don’t have much credit history. This meant that the credit limit on my card was pretty small. But, even with only a couple of hundred pounds to play with, I was still sure I'd do something wrong and end up owing someone all my worldly possessions. So I just left my card unused.
This wouldn't be so much of a problem if it wasn't for the fact that this first step on my credit quest had actually caused my score to drop. When you apply for a credit card the lender will conduct a credit check on you and awill appear on your report, which can actually cause your score to dip, which is what happened to mine.
Now this isn't usually a problem - you just start using your credit card and your score recovers pretty quickly (and then if all goes to plan it continues to grow). But in my infinite wisdom, my score had taken a hit and I wasn't actually taking those next steps to improving it. (Really doing well at achieving my goals here). So the first thing I realised is I actually had to be proactive and start using my credit card.
2. Starting slowly is the way forward
At university I’d been so used to watching how every transaction immediately took a chunk out of my bank balance. But with a credit card you don’t see that instant effect. This made it pretty scary to want to put anything on my card. In fact, it took me a good couple of months (four to be exact) to pluck up the courage to use it for the first time.
In the end, I followed my own advice - which is when it's your first card, start spending slowly and set up a direct debit to automate all your payments.
So I transferred my Netflix and Spotify accounts over to my credit card, so that each month a set amount comes out that I can pay off to help prove to lenders (and myself) that I am responsible.
And that was my first ever purchase on credit. There were no ringing bells, no alarms or confetti, and it went smoothly like any other transaction.
Now that I’d got over my irrational fear of spending on my credit card, I could breathe a slight sigh of relief. I’d already set up a direct debit to pay my balance in full each month, as that way I knew I wouldn't accrue any interest.
However, like anytime you're doing something new the doubt is never far away. Despite the fact I'd done everything 'by the book' I was pretty sure I’d done something wrong and was, at this very moment, accruing interest at a rate of knots.
So (after a few days of procrastinating) I decided to be sensible and systematically check up on everything online. Here's my list:
- Log in to your credit card account
- Double check that you’re paying the full balance each month. (If you're not sure call your lender and ask - they won't mind. Honest).
- Check the direct debit for your card is coming from the current account you thought it was.
- Check there's enough money in that current account to cover your bill every month. Turns out it's pretty simple.
3. The ins and outs of credit cards are confusing when you think about them too much
One of the big things I've been warned about was not to use your credit card for cash transactions (i.e. taking cash out of an ATM on your credit card) because you start to accrue interest immediately. Really, credit cards should just be for purchases, as you won't accrue any interest until after your monthly statement is due.
Now I know what the word 'purchase' means. But with my credit card in hand and a fear of interest rates in me, the self-doubt started. What exactly was a purchase? And what counted as a cash transaction?
Cash transactions include withdrawing money from an ATM, moving money from your credit card into a current account, buying foreign currency or on any gambling transactions.
But the thing that tripped me up was contactless on the tube. I’d definitely heard a rumour that using your credit card like an oyster card didn’t count as a purchase so you’d pay interest straight away. So I'd go to use my card on the tube, stress out, cause a small queue of angry people then end up using my debit card again. Turns out this just wasn’t true - don’t believe everything you hear.
Get to know the basics of when you'll pay interest and when you won't by checking your card's terms and conditions. If you go to use your credit card for anything that isn't obviously a purchase, just check first. That way you don't have to overthink everything and confuse yourself.
4. Getting a credit card hasn't changed my life yet - but it could
My initial aversion to credit may seem silly, but I know from working in finance there are a lot of misunderstandings out there, which has made me pretty cautious.
A few months on and it's good news. I'm not up to my eyeballs in debt. In fact, since using my credit card I'm in no more debt than I was before (hello student loan, my old friend). And as I've started to use my credit card a bit more, my score has started to creep up. It's going to be slow and steady progress and I definitely don't have a credit score in the 600s yet, but it's just been so nice to see some actual progress.
When you’re a student, or even just after, your financial situation can feel pretty out of your control. Your finances are squeezed, and everything you read tells you that you’ll never be able to buy a house and you won’t retire until you’re 105 years old. So it's been great to work on one area of my finances I can control - my credit score.
One day I'm sure I'll get to be one of those people that uses their credit card to get free air miles and jet around the world (please let me have this dream). But for now, I'll keep using my credit card little and often to build my score.
At least this way, when it comes to achieving my other big goal of buying my own house, it won't be my credit score that holds me back.