Welcome to a non-finance expert explanation on credit cards: For Beginners. There is no intermediate or advanced lesson as I will happily keep with my simple budget. But hopefully after this, you will have an understanding of how a credit card works and how I manage my only credit card, and plan for my next one.
Why it might be worth having a credit card
Most gurus would not recommend using a credit card for emergency expenses, and I agree to an extent. But sometimes you get desperate. Just note, you do need to keep an eye on your credit card. It’s not a good idea to think it will solve itself. Poor management of a credit card will affect your ability to get a loan, a mortgage, sometimes a rental property, or a car. So, even though its worth having a card (imo), you need to be ‘locked in’ on it.
Other benefits: Some cards give you cashback or airmiles, (to reduce flying ticket costs or seat upgrades). Others boost your credit score (if you need the help). The rest have other offers like 0% for a fixed time (which is good for paying back a balance without the interest being a pain), or balance transfer, (switch credit card companies and remove the balance off the old card and move it to the new card).
Either way, there are plenty of reasons to have a credit card, and I also know people who don’t ever want a credit card. You are entitled to do whatever you want.
How to use credit cards
So, let’s say you get a credit card and it’s arrived in the post, you got your pin and the APR is 29.9%.
After 1 month of spending you get your bank statement, which tells you how much you have spent, the minimum payment required and the date they want the minimum payment. Since this is the first month, there is no interest charged yet. If you pay that balance in full, then next month you won’t have any interest to pay, you just pay back the amount you spent in month 2. And this cycle keeps going when you pay the balance on the card in full each month, by the required date.
If you do not pay the balance in full (or only pay the minimum payment), then next month you will be charged interest on the balance left on the card by the date of minimum payment. So, when you go through another month and then get that statement back, there will be the money you spent on the card that month, PLUS the money that remained on the card last month, PLUS the interest charged on that balance. The interest is the APR (I believe), so if you had £10 left on the card by the date of payment and you didn’t spend any money in the next month; then, on your statement you would be charged £12.99. Which is the £10 balance from last month, PLUS the APR (interest) charged on that balance (29.9% of £10 = 2.99).
What to look out for with credit cards
If you take out a credit card, it will lower your credit score for about 6 months. This is fine and normal, because credit companies are weird like that. They punish you for getting credit or finishing credit, but if you just have credit its fine. However, during that 6 months after you get a credit card, you should not get any more credit. Whether that’s a car finance, mortgage, loan, overdraft or credit card. Doing this has a worse effect, if you do it too soon. They always suggest waiting 6-12 months before doing anything new with your credit.
Credit card dos:
When applying for a credit cards ALWAYS look at the APR’s. The average ones are around 30%, which is manageable, if you leave a balance on the card. But providers like AMEX have APRs like 88%, which is wild. So, if you don’t believe you will pay it off every month, it’s probably worth not going for an AMEX yet. But that’s my logic on not getting an AMEX right now.
Also, check if the perks are worth it. For me, I wouldn’t settle for 0.25% cashback since other non-credit cards give 1%. I am still figuring out how airmiles work because I don’t travel a lot, but to be in airport lounges, sounds pretty cool. But some depend on airline providers, and I am not a brand loyal person, so it’s hard to tell right now.
Before you apply for a credit card, always check if you are eligible. This step normally doesn’t have an effect on your credit score (make sure they say that before you click on anything). Checking if you’re eligible means you can see before you apply. If they can approve you, go ahead, if they say no, it’s best not to risk it. As failing a credit card application harms your credit score, as companies always check if you have ever been rejected before, so this might impact your score for life. Also, applying for a credit card involves a hard search on your credit score, which stays on record 6 months.
Credit card don’ts:
Do not close a credit card unless you absolutely have to. Closing a credit card, deletes the credit history it gave you. The less credit history you have the worse your credit score. At best, if you want use one card more than other, stick a small subscription, like amazon prime on it. Then you pay it off every month, the card is used, and gives you a credit history for your future.
Try not to exceed 30% of your allowed credit limit. The more you spend on your card, the more credit companies think you are unreliable with money. Hence, they lower your score. Keeping your usage below 30% is healthy for them (I don’t know why). What I do, is use my card (currently struggling to pay off the balance but that’s fine for now lol), and every 6 months they increase my limit. Since they increase my limit, my 30% is also higher, so I have space if I need it. It can take a while. It took me 18 months to get my first increase, and since then I have 5x my limit (2.5 years later). So, let them increase the limit, but don’t change how much you spend.
However, increasing your limit also increases how much the interest (APR) is. I’ll admit, I started on 29.66%, and since I have 5x my credit limit, it’s at nearly 31%. Not a lot, but I can see my minimum payments are a little higher, even though the balance on my card has barely changed in the last 3 years.
