Credit Cards Unraveled:What to know before getting your first credit card

Way back when I was a kid and saw my mom pull out her credit card, I decided then and there that the innocuous little card was an awfully grown-up thing to have. Today’s kids might not be as impressionable as I was, but this article is for anyone out there hoping to get their first credit card, and feeling a bit confused or intimidated.

A credit card can be a knife in your hand; it’s a good tool to have, but if you aren’t careful with it, the outcome can be damaging. You don’t necessarily need a credit card to go through life, and if you have trouble sticking to a budget, it may be wise to leave well enough alone. But there are some undeniable benefits that a credit card can offer to a responsible individual.

For one thing, it can help your credit score; use your plastic responsibly, and that’s a pretty good indicator that you can be smart and responsible about your purchases and payments. Since your credit score impacts your chances of being approved for a loan and the amount of interest you have to pay for said loan, it’s always a good idea to avoid being flippant with your credit card.

There’s also a layer of security that comes with a card. If your wallet gets lost, the cash you have in it are gone forever, but you can easily cancel your card and dispute any pur- chases that you have not made.

It’s easy to figure out the basics of how a credit card works; whenever you pull your credit card out to buy something, your credit card company provides the funds up front, and you only have to pay at a later date. It’s basically a god send when you need something as soon as possible but won’t get the money to afford it until it’s too late. But on the other hand, unless you pay off the bill each month, your credit card will cost you additional charges like late fees and interest.

While there are so many credit cards that are on offer out there, and while they all look good on paper, selecting a credit card is not as easy as simply applying for the one that sounds the most attractive. Your credit card should fit you and your wallet (in more ways than one).

If you are about to select a credit card, there are some things that you have to consider like your spending habits, the interest rate, the credit limit, fees and penalties, balance computation methods and rewards.

Spending Habits

Before you apply for a credit card, do a bit of soul-searching and decide how you are going to use it. Are you the kind of person who can and will pay off the bill faithfully every month without fail? Is the credit card only for emergencies or do you plan to use it to pay for the majority of your purchases?

If you are diligent about paying bills, a card with no annual fee and a longer grace period would probably be a better fit for you, while a card with a low introductory rate and a low-interest rate would be better for someone who would carry a balance from month to month.

If you plan to use the card to make regular purchases, a generous credit limit and an attractive value added service along with a good rewards programme.

The interest rate

Your credit card can have one of two annual percentage rate- it’s either a fixed rate or a variable rate that is most commonly tied to a prime rate. A fixed-card rate allows you to know what the interest rate is from month to month, but with a variable rate, that can fluctuate.

Credit limit

Your credit card issuer is willing to let you borrow money up to a limit also known as the ‘Credit Limit’. Depending on your credit history, your credit limit can be either low or high. It’s up to you to make sure that you don’t go beyond your credit limit. A maxed out credit limit can not only damage your credit score, there’s a penalty and some issuers cut the credit limit to a lower amount than your current balance.

Fees and penalties

There are several charges that come with a credit card and the number of charges that your credit card issuers have may actually catch you by surprise at a later date unless you make inquiries beforehand. There are transaction fees such as balance transfers and cash advances, as well as penalty charges for late bill payments or maxing out your credit limit. Make sure that the card you want to apply for has reasonable fees.

Balance computation method

If you are planning to carry a balance, ask your card issuer how they calculate the finance charges before you commit to anything.

Rewards

Many cards offer rewards that tend to attract people in an effort to induce them to use the card. It can be a nice benefit. Look for cards that offer rewards that you are actually likely to use. Keep an eye out on restrictions that might be in place, whether there are any expiry dates for the rewards, etc.