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All you need to know when choosing your first credit card

All you need to know when choosing your first credit card

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than purchases and there is usually no interest-free period so you are charged interest from the moment the money is withdrawn.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.

Annual fees

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.

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 it all and get stuck in a cycle of increasing debt due to interest rates.

Minimum payment

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.

Rewards Programs

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.

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Learn more about credit cards

How does credit card interest work?

Generally, when we talk about credit card interest, we mean the purchase interest rate, which is the interest charged on purchases you make with your credit card.

If you don’t pay your full balance each month (or even if you pay the minimum amount), you are charged interest on all the outstanding transactions and the remaining balance. However, interest is also charged on cash advances, balance transfers, special rate offers and, in some cases, even the fees charged by the company.

The interest rate can vary, depending on the credit card. Some have an interest-free period, otherwise you start paying interest from the day you make a purchase or from the day your monthly statement is issued. So avoid interest by paying the full amount promptly.

How is credit card interest charged?

Your credit card will be charged interest when you don’t pay off the balance on your credit card. Your card provider or bank charges you the individual interest rate that is associated with your card, which is usually between 10 and 20 per cent. 

The interest will be added onto your bill each month or billing period if you don’t pay off the balance, unless you are in an interest-free period.

You will be charged interest on anything that hasn’t been paid for inside the interest-free period. Usually you will receive a notice on your bill or statement saying you will be charged interest so you have some form of notice before you’re charged.

How do you use credit cards?

A credit card can be an easy way to make purchases online, in person or over the phone. When used properly, a credit card can even help you manage your cash flow. But before applying for a credit card, it’s good to know how they work. A credit card is essentially a personal line of credit which lets you buy things and pay for them later. As a card holder, you’ll be given a credit limit and (potentially) charged interest on the money the bank lends you. At the end of each billing period, the bank will send you a statement which shows your outstanding balance and the minimum amount you need to pay back. If you don’t pay back the full balance amount, the bank will begin charging you interest.

Can a pensioner get a credit card?

It is possible to get a credit card as a pensioner. There are some factors to keep in mind, including:

  • Annual income. Look for credit cards with minimum annual income requirements you can meet. 
  • Annual fees. If high fees are a concern for you, opt for a card with a low or $0 annual fee. 
  • Interest rate. Make sure you won’t have any nasty surprises on your credit card bill. Compare cards with a low interest rates to minimise risk.