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All you need to know when choosing your first credit card
Applying for your first credit card? Stop right there. Before you click apply, read these tips by RateCity, which may save you money.
June 15, 2010
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, here are some things that you need to know to help you understand credit cards better and help you avoid the high interest rate trap.
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 that you withdraw the money. It is best to avoid making cash withdrawals if you don't need to.
Annual fees: Some financial institutions charge annual fees to use their service and are debited from your credit card account or added to your bill each year. When looking for a credit card, compare cards that offer no or low annual fees so that you don't pay more than what you have to.
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 and leave enough time for funds to transfer.
Credit limit: 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 their limit and get stuck not being able to pay this amount back which can take them years.
Minimum payment: A minimum payment is the smallest amount required to pay 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 would take you years to pay off. Pay more than the minimum required or better still try and pay the balance in full to save on interest charges.
Finally, always read the product disclosure statement which shows a full list of fees and charges before signing on the dotted line.
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