How to Choose Your First Credit Card

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Credit cards are an important part of building your own personal credit score and securing your financial future. While credit cards often get a bad reputation since they’re easy to abuse, they’re actually a great tool when used wisely, no matter if it’s your first credit card or you’re an experienced user.

Getting your first credit is a right of passage. It means you’re growing up and handling your own finances like an adult. However, research from Finder shows that only 41% of young people today have a credit card. Other generations are much more likely to take on debt than younger people, and much of this is attributed to a fear of debt. This is a rational fear, especially considering how the average Australian owes at least $3912 on a credit card.

Despite the risks of misuse, credit cards have a lot of benefits. They protect you from fraud, they help you build credit, and some even come with rewards points. Like many financial decisions, credit cards come with some risk, however, so it’s important to choose a card you can use responsibly. This guide will help you choose your first credit card with confidence.

How Do Credit Cards Work?

When you don’t understand how credit cards work, it’s easy to fall into the trap of overspending. Technically speaking, a credit card is a plastic card connected to a bank. This card has information encoded that ties the card to your credit card account.

So what exactly is a credit card account? This is a form of debt. Before you worry, it’s not as scary as it sounds. Instead of a debit card where you’re spending money you already have in your checking account, this is money you’re borrowing from the bank. Your credit card account will have a credit limit, and this is the maximum the card company is allowing you to borrow.

The amount of debt on your card is known as your balance. You’ll need to pay a minimum payment every month to stay current on your balance. Any remaining money left over in your balance as debt will be charged your credit card annual percentage rate (APR), also known as the rate at which your balance accrues interest. If you pay the full balance every month, you won’t pay any interest.

What Are Credit Card Fees?

Having a credit card isn’t free. Like most other bank accounts, you’ll need to pay regular fees depending on your actions. These fees are all outlined in your credit card agreement which you have to sign when you open a new credit card account.

Some cards have no fees while others have higher fees with more perks. Many times, these fees will depend on your particular card.

  • Balance Transfer Fees – If you use one credit card to pay the balance of another, you’ll need to pay the balance transfer fee.
  • Cash Advance Fees – If you borrow credit in the form of cash instead of through a purchase, this either has a higher interest rate or a fee.
  • Annual Fee – This fee is paid annually to maintain active status.
  • Foreign Fees – A foreign fee is for any fee outside of your domestic country.
  • Late Payment Fees – Finally, if you fail to pay your minimum payment on time, you’ll be subject to a late payment fee.

Choosing the Right First Credit Card

There are a few different types of cards you can choose from these days. As we said above, many come with special perks appealing to first-time credit card holders. Each card works a bit differently, so make sure you understand just what you’re signing up for.

  • Secured Credit Card – This card needs a cash deposit used as collateral against your balance. If you have no credit, this might be the easiest one to qualify for since it’s designed for people who need to build credit.
  • Rewards Cards – A rewards card comes with perks for the cardholder in the form of rewards points, cash back, or redeemable purchases for travel or retail.
  • Charge Cards – A charge card requires the cardholder to pay the balance in full every month.
  • Retail Cards – Finally, retail cards are offered from specific retailers or store, usually in exchange for a discount or other perks at the retailer.

Make a Responsible Choice

As long as you know how credit cards work and educate yourself about your particular card, obtaining the first credit card can be a great tool. Not only will you effectively build your own credit, but you might even get some rewards points or perks from a specific card. Read on how to use credit cards the right way.

Are you ready to choose your first credit card? If so, you’re in good hands. Debt Busters can help you find the best credit card for your financial needs. We’ll build a picture of your financial situation and credit goals in order to help you choose the best card to achieve financial success. From there, we’ll help you manage your card successfully and build healthy money habits. Contact a financial expert on 1300 368 322 today to get started.

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