Applying for your first credit card? Whether you have been putting off getting a credit card for years or you have recently landed your first full-time job, a credit card is a big commitment which shouldn't be taken lightly.
If you are considering taking the plunge into the world of credit cards, there are some things you need to know to help you understand credit cards better and avoid paying hefty interest rates and fees.
Here are some terms you should get to know before choosing a card suited to you.
Purchase interest rate
This is the amount that a financial institution charges you when you make a purchase. Compare credit cards online to find a credit card that offers a low interest rate so you can avoid paying more in interest charges.
Cash advance interest rate
This is the amount of interest a financial institution will charge you for making cash withdrawals. This is usually at a much higher interest rate than purchases and there is usually no interest-free period so you are charged interest from the moment the money is withdrawn. It is best to avoid making cash withdrawals if you don't need to.
Some financial institutions charge annual fees to use their service which are debited from your credit card account or added to your bill each year. When looking for a credit card, it may be useful to compare cards on the required annual fee to ensure that you are paying a competitive rate.
Interest free period
An interest-free period is the time frame in which you do not pay any interest on purchases. Each card offers different interest free periods but the common period is usually 55 days. To avoid paying interest, take advantage of this time and pay for your purchases before the interest-free period ends.
This is the total limit set on your card. For a first card it is better to opt for a low limit like $2000. The lower the limit the more control you have over your card, the less money you have to pay back and the more chance you have of controlling your balance. Some people with a higher credit card limit are tempted to spend it all and get stuck in a cycle of increasing debt due to interest rates.
A minimum payment is the smallest amount you are required to pay on your credit card bill. Minimum payments are usually around 3 percent of the balance so if you were to pay the bare minimum each month it could end up taking decades to pay of your balance. Pay more than the minimum required or better still try and pay the balance in full to save on interest charges.
Some credit cards are part of rewards programs offered by providers where you can earn points for spending money on your card. these points can be used for a range of things depending on the program including flights and hotels for your next trip away. It is important to weigh up the benefit of these rewards against their fees and interest rates when deciding if these cards are for you. The RateCity Rewards Program Comparison tool is a good place to start looking at these types of cards.
Finally, always read the product disclosure statement which shows a full list of fees and charges before signing on the dotted line.