Credit Card for Beginners – How to Use it Wisely
If you are new to credit cards, it is essential to be informed on how they work. This post provides basic information on how to use a credit card and ways to avoid the traps, specifically for beginners.
Table of Contents
What is a Credit Card?
A credit card essentially works like a debit card. When purchasing in-store, you simply swipe, insert, or tap the card against the reader. You can also put it in your digital wallet (like Apple Pay, Samsung Pay or Google Pay) or Payment platforms (e.g. Paypal) and use it to pay for items online.
However, there is a key difference between them. When using a credit card, you pay for items using some credit or your lender’s money. You do not need money stored in your account like a debit card.
Let me make that clear. With a debit card, you are buying products and services with your own money from your bank account. Whereas with a credit card, you are using and borrowing someone else’s money, that someone else can be a bank, another financial institution, or even a certain store (think of Coles and David Jones). It is called a ‘credit’ card because it is a short-term loan that you will need to pay it later.
At the end of each month or billing period, you will get a statement that lists your transactions, the amount you need to pay and when the payment is due.
With a credit card, you are using and borrowing someone else’s money
What are the Advantages of Using a Credit Card?
- Build credit history and credit rating – A healthy credit score will be a clear benefit. This is if you are up to date with repayments and do not open too many credit cards either at one time or successively. Good credit history is required if you are looking to apply for a mortgage or personal loan in the future.
- Convenience – Credit cards allow you to process instant payments in emergency and non-emergency situations equally. They are a widely accepted form of payment worldwide. Credit cards eliminate the need to carry cash which can be bulky in your wallet if you need a considerable amount of money.
- Rewards – Some credit cards provide you with perks. You may be given sign-up bonuses and/or ongoing rewards. These can be cashback, airline miles or points that can be redeemed for gift cards, vouchers, credits, and the like. Others may include entertainment and dining perks as well.
- Insurances – Many credit cards include complimentary purchase protection insurance, extended warranties, and travel insurance to name a few. It is important to read your Product Disclosure Statement (PDS) as not all insurances are created equal. You may still need to get additional coverage as your credit card may not be sufficient for your needs.
What are the Disadvantages of Using a Credit Card?
- Debt – It can be tempting to use the money you do not have, resulting in debt. There are ways to prevent this from happening to you. The number one step is being informed, which you are already doing just by reading this article so kudos to you! To know more about how to avoid debt, keep reading.
- Negative impact on credit score – As much as you can build a good credit score with credit cards, you can also ruin it. This comes back to improper use of credit cards and signing up for too many at short time intervals.
- Fraud and scams – Unfortunately, data breaches and online hacking can occur. Fraudsters and scammers can access your card details and use them illegally. Being careful when, where and how you use your credit card can prevent this. The beauty though is that you can dispute unauthorised credit card transactions and often get the transaction reversed.
As much as you can build a good credit score with credit cards, you can also ruin it.
Understanding Credit Card Terms
Here are the most common credit card terms you need to familiarise yourself with if you are looking at getting a credit card. Please note that financial institutions in various countries may call them differently. To explain the words well, you will also notice some repetition in ideas.
Credit Limit
When you get a credit card, the lender provides you with a credit limit. The credit limit is the maximum amount of purchases you can make with your credit card at any one time.
Credit limits can be anywhere from $500 to $15,000 or even higher. It varies significantly depending on the provider, the specific credit card, and your financial standing at the time of application. The provider assesses your credit scores, credit history, annual income and other factors that may want to use to determine this.
Although the lending company gives you a credit limit, you can opt for a smaller one. This is where it can get confusing for some.
For instance, credit card A has a minimum credit limit of $1,000 and a maximum credit limit of $6,000. When you applied for the card, your bank is happy to give you the maximum credit limit of $6,000. You can always keep this maximum credit limit if you want. But you can likewise lower it to suit your needs to as low as $500. You can do this by just going to their website or app.
Interest Rates or Annual Percentage Rate (APR)
This is simply the amount of interest, expressed in annual percentage, that will apply to any unpaid credit card balance at the due date.
There are low-rate credit cards that offer around an 8% interest rate. Other cards have very high-interest rates which can be as much as 25%.
Be mindful that some lenders may give you introductory or honeymoon rates when you sign-up, which are lower than the regular interest rates. If this is the case, make sure you know the terms and conditions and when the regular interest rates will resume.
Interest-free or Grace Period
Interest-free or grace period refers to the set time that you must pay off any credit card purchases before it starts accruing any interest. The interest-free period varies, it is typically 44 to 55 days, sometimes less.
After the grace period, you will need to pay interest on your remaining balance if you do not pay the entire balance on the due date. The interest rate starts at the time you made the purchases and NOT at the end of the interest-free period.
Balance Transfer
This feature allows you to transfer your balance from one credit card to another one (which usually will have a lower interest or no interest for a certain period).
This can be handy if you have outstanding debts from a high-rate credit card and are hoping to cut on the interest so you can catch up with repayments. Not all credit card providers offer this though.
Balance or Closing Balance
Balance is the amount you are owing on your credit card. This is the total amount you need to pay at the due date to avoid interest.
Available Credit
Available credit refers to the amount of credit you have remaining during the statement period or billing cycle. In other words, it is your credit limit minus your balance at the time of checking your credit card account.
Your balance and available credit are interrelated. When you make a purchase with your credit card, you will see your available credit decrease while your balance will increase. On the other hand, if you pay off your balance in part or in full, your available credit increases or reverts to the maximum amount (set credit limit) respectively.
Minimum Payment
The minimum amount you need to pay at the due date is to avoid a late payment fee.
Fees and Charges
There are certain fees and charges applicable when you have a credit card. The following are just some examples:
- Annual or monthly fee – The lending company will charge you a fee either on an annual or monthly basis simply for having a credit card. You need to pay regardless if you use your credit card or not. Of course, no annual fee cards are an exception.
- Late payment fee – This is taken out if you missed paying the minimum repayment required at the due date as mentioned previously.
- Cash advances fee – Some cards let you do cash advances which are cash taken out from your credit card. This usually comes with high fees and typically accumulates interest right from the date of withdrawal. For this reason, try not to use it as much as possible.
- Overseas or international transaction fees – This fee is payable if you use your card to shop from an online overseas store or while in a foreign country.
Credit Card Statement
A credit card statement works somehow like your usual bank account statement. It summarises the applicable sums and minuses.
The credit card statement shows your purchases, fees, charges, any amount you paid, available credit, total balance, minimum repayment required and the payment due date. It also tells you your billing cycle or statement period (the start and end of your spending month).
Credit Card Types
Financial institutions advertise different credit card types to cater for certain purposes or lifestyles.
- No or low-fee credit cards – As mentioned above, you can get a credit card with no annual fee. There are also low annual fee alternatives. These credit cards often come with higher interest rates. Still, in my opinion, these are generally the best types of credit cards especially if you can fully pay your balance consistently.
- No or low-interest credit cards – This type will suit you if are worried about your ability to pay the full balance each month. Lower interest rates mean you accumulate less debt and can pay it fast.
- Rewards credit cards – These types of credit cards let you get rewards simply by using your credit card for any qualifying purchase. A tip is to choose a card with high rewards rates that align with your spending habits. These cards often come with higher interest rates and expensive annual fees too. You need to carefully consider if the yearly cost offsets the benefits of the card.
Not sure what is the best card for you? Apart from assessing your own spending habits and lifestyle, comparison websites may help. Alternatively, visit individual lenders to compare the annual fees, interest rates, insurance covers, benefits and other terms.
How to Apply for a Credit Card
The application process is usually easy. Most lenders allow online applications and require you to provide some of the following:
- Identity details
- Contact information
- Employment or business details
- Annual income from all sources
- Assets – like property
- Regular expenses – can be weekly, fortnightly, monthly or yearly
- Debts – current credit card, home loan, personal loan, car loan, study loans
You will also need your IDs, payslips, bank statements and other relevant documents to support your application. The form will tell you what you require.
You may get instant approval or rejection if you apply online. If not, then you will hear back from them either by phone, e-mail or conventional mail.
Tips on How to Use a Credit Card Wisely
Once you are successful in your credit card application, you should strive to use it well. The next points will help you do this.
*Consistently Pay in FULL and ON TIME
Every month, on the due date, you have two options – either pay the entire closing balance or make the minimum payment.
Again, paying your balance in full will stop you from acquiring interest. This is the top-secret to avoiding any credit card interest.
On the other hand, you prevent incurring late payment fees if you pay the minimum payment. But you will still accumulate and pay interest on the remaining unpaid balance. Interest fees instantly increase the amount of money you must pay later. In the long run, this interest will also earn interest that can take years to pay.
Of similar importance is paying on time – before or on the due date. Note that you will also accrue interest on your balance if you pay after this time.
If there is anything you’ll take away from this post, it is this one. Consistently pay your full closing balance, in time every single month. Period. Your payment history is the most important factor used in determining your credit score. If you always pay on time, you will most likely get approvals for prospective loan applications.
To avoid missing the due date, you may want to automate your payments or set a direct debit if your lender allows it. Otherwise, remind yourself by using a calendar. You must also make sure you have enough money in the account you wish to get debited from. Not having the needed funds puts you at risk of incurring hefty fees.
If you are struggling to pay your credit card, try to acknowledge the issue and seek help early. Contact your bank or financial counsellor as they may be able to offer you some solutions.
*Spend Responsibly
The problem with some credit card users is the notion that it provides you access to free money. I will reiterate that anything you purchase using a credit card is a loan. You are borrowing someone’s money and you need to pay it back later. Keeping this in mind will help you be cautious with your spending.
Treat your credit card as if it is cash or a debit card. Only use the credit for things you really need. Let us put emphasis on “need” because disciplined spending means you do not buy non-essential goods and services. Use it with items you can comfortably afford to pay upfront with your own money or can confidently pay back on time. Never use it to rationalise buying things you would not otherwise afford.
Before you swipe or tap, think of these 3 questions:
- Do I need it?
- Can I pay it in FULL upfront even without a credit card?
- Can I pay it back on time?
Ideally, should be able to answer yes to all your questions before you proceed with the transaction. On the other hand, if you answer no to any of these questions, then stop and reassess the situation.
Treat your credit card as if it is cash or a debit card.
Only use the credit for things you really need.
*Keep a Low Balance
Just because you have a generous credit limit doesn’t mean you should spend it all. In fact, keep your balance at a minimum and not max out on your credit card ever. Maxing out makes lenders think that you are a high-risk borrower.
This is where the concept of credit utilisation ratio comes in, the second most important factor that affects your credit history.
The credit utilisation ratio is a figure that indicates how much of your available credit you are using. To calculate this, you divide your credit card balance by your credit limit.
For instance, you have a balance of $1000 and your credit limit is $5,000. $1000/$5000 = 0.20 = 20%. Ideally, you should aim for a credit utilisation ratio of 30% or less. The lower, the better.
*Track your Spending
Stick with your budget and track your expenses always.
You can easily track your expenses by checking your transaction history via the financial institutions’ website or app. This will help you understand your spending habits as well.
Try to put a monthly spending limit on yourself. If you are struggling or unsure of your spending limit, find a budget method that suits you. The 50/30/20 rule is one example that most people find effective.
Once you reach your spending limit, steer away from your credit card until you clear the balance off.
*Set a Reasonable Credit Limit
If you are worried about overspending, take the minimum credit limit possible. As mentioned earlier, you can always change it if needed.
Nevertheless, if your credit utilisation ratio sits above 30% but can pay on time and in full, then you may want to request a bigger credit limit so that you can achieve a lower ratio.
*Know your Billing Cycle
Most credit cards have a unique billing cycle. Being aware of your billing cycle will keep you informed of your payment due date. Your due date will be around the same day each month. Since not all the months have 30 days, it can be off by one to two days.
If you can, time your major purchases so you can maximise the interest-free period. Sure, not all expenses can be scheduled but things like your grocery shopping day may be adjusted.
Keep your balance at a minimum and not max out on your credit card ever.
*Carefully Check your Statements
Do not just blindly accept your statement and pay for it.
Check the fees. Verify that every transaction under your account is legitimately yours. With this, you can spot any unauthorised use of your card.
If you find an unfamiliar transaction, report it to your provider immediately. They will lodge an investigation and reimburse you. Additionally, they may issue you with a new card or close your account temporarily to prevent further fraudulent use.
*Report a Lost or Stolen Card Promptly
You should always be aware of where your credit card is. If you suspect that it is lost or stolen, contact your financial institution immediately.
This is so they can deactivate your account to stop anyone else from using your credit card. You may at the same time, notify them of any purchases you did not make so that can do something about it.
In case you cannot get in touch with them instantly, you may also be able to lock your card via your app or online banking.
*Don’t Forget the Perks
If you have a rewards credit card, understand the earning methods and claiming procedures. Be mindful of any complimentary insurances that may apply to your purchases too. You may need them later on.
Since there are so numerous kinds of perks out there, your provider is in the best position to advise you. Alternatively, check your PDS for more information.
Also, note that some rewards can expire, so use them before it is too late.
If there is anything you’ll take away from this post, it is this one. Consistently pay your full closing balance, in time every single month.
My Personal Credit Card Story
Let me share with you my experience with credit cards. I am not saying that I am a pro credit card user but a decade worth of credit card ownership for someone my age is not bad.
In 2012, my bank offered me a Platinum credit card with the usual yearly fee of $99 waived. I was initially apprehensive about owning one because I have heard a lot of negative things about credit cards.
However, my dad who has been using them encouraged me to grab the “opportunity” and taught me how to properly manage it. I am glad that I did as this credit card is still with me up to this day and will remain my forever credit card.
Over the last decade, I earned zero interest because I always paid the entire balance every month. Although once, I was charged a late payment fee. I was overseas at the time and was clearly disorientated. This event prompted me to set up a direct debit to never forget about it.
I had a couple of other credit cards in the past too. Some accumulated rewards with sign-up bonuses. Initially, I was using them for the sake of gaining points. Later on, I realised that it was a poor financial decision. Instead of buying random things to meet eligibility or bonus points, I paid some of my large bills early (like car registration, professional memberships and insurance) and spent as I normally would. Thankfully, I learned the lesson fast and did not suffer financially from it.
A couple of months ago, I also applied for another credit card but got rejected. I am still trying to seek an explanation from the provider why that was the case. The problem could be that I overestimated my expenses or I underestimated my income like I always do to keep my cost of living low. Until I hear from them, who knows? I will update this blog entry once I get an answer.
Nonetheless, as a result of this application, my credit score decreased. Fortunately, I have no plans of applying for another big loan soon. But if I did, lenders may not accept my applications due to this one. My case shows why you should be careful when applying for a credit card as it can hurt your credit history.
In my experince, credit cards are great when booking flights as I get complimentary travel insurance. I also use them to purchase electronic devices because I get a 12-month extended warranty. Additionally, it can be handy if the product arrived damaged or did not turn up at all. I never had to query an unauthorised transaction but someone in the family did. The bank investigated and returned the money.
In a Nutshell
TLDR? Here is a quick summary.
Using a credit card may seem to be simple on the surface. You have a card that you can swipe anytime, almost anywhere to pay for anything! Sure, it is straightforward and convenient. Not only that, having a credit card can even help you get a good credit score and other rewards. But it can result in significant stress, and life-changing debt if not used wisely.
Before signing up for one, it is crucial to be informed. Pick the one suits you best. Find out about all the fees, interest rates and any perks available. Read the Product Disclosure Statement and contact the lender if you still have questions.
Credit cards are one of the largest sources of debt in the world. To avoid the death trap, practice mindful spending, treat it like a debit card or cash and religiously pay your balances in full every month on time. Set a reminder to pay your balance or arrange automatic debits to avoid missing payments.
I hope this is helpful.
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