Key points to remember
A credit check will be required to assess you.
Applying for a credit card (or any type of lending) requires a credit check run against you. A lender will assess your income and financial commitments to determine your risk. They will then either accept or decline your application.
As criteria varies between lenders, you could be accepted by one but declined by another. Before applying, it's best to know your credit score first. This will help you understand how likely you are to be accepted.
Be aware that any application you make will leave a mark on your credit report. This is true even if you are declined, which may impact future credit applications. As a result, you should not make many applications in a short period of time.
A credit limit will be set based on your profile
Your credit limit is the most you can borrow at any one time. It is set by the credit card provider and based on many factors including your credit history. You will know your limit once approved.
After using the card for a few months, you may be able to request increasing, or reducing your limit. It is also possible that your provider may increase your limit automatically.
Be aware that if you spend your credit limit or more, you may incur charges. More likely, you may not be able to use your credit card until all or a part of the card balance has been paid.
Try to pay the balance in full or make the minimum payment every month
Your credit card provider will send you a bill every month listing your spending in that time. It will tell you: the total balance (to pay off the card in full); the minimum payment (to pay off a part of the card); and a due date for the payment.
Paying the total balance in full by the due date will not incur interest and is the cheapest option if you can.
If you can't pay the total balance, make the minimum payment at least. In this option you will incur interest on the remaining balance until this is paid off.
Failure to make payment (even the minimum amount) may result in you being charged a late payment fee. It will also be marked as a missed payment, leaving a negative mark on your credit report for some years.
Avoid withdrawing cash on your credit card
Withdrawing cash (also known as a credit card cash advance) is an easy but expensive way of borrowing money. Interest is charged from day one and is usually at a higher rate than the standard interest rate (APR) for your card.
Your provider may also charge you fees for withdrawals, either as a flat fee or percentage of the amount you have withdrawn.
Withdrawing cash on your credit card is not recommended. If you must though, aim to make a payment as soon as possible to minimize costs to you.
How you manage your credit card will influence your credit report
Your credit report contains many activities you will have conducted on your card. One of the most important aspects is your repayment history. Paying the minimum amount, or more, before the due date will highlight to other lenders your track record of successful payments. As you may guess, this has a positive impact on your credit score!
If you have any missed payments; spent all (even exceeded) your credit limit; or withdrawn cash frequently, this has a negative impact on your score. Other lenders could determine you to be a risk to lend to. Missed payments can remain on your report for many years.
Be aware that the number of credit cards you have, credit limits and amounts owed are also tracked. Managing your credit card is one of the most important aspects of your financial success.
Why have a credit card?
When used responsibly, a credit card can be quite a powerful tool in your financial armoury. It offers protection on purchases, builds credit score and can help towards future borrowing needs (e.g. a mortgage or car financing).
When using a credit card, your provider is actually paying and will send you a bill each month to pay the balance. It may be better to think of it as a small loan, rather than credit. Any spending on the card is creating debt that you will need to pay back.
If you don’t use a credit card because of previous debt problems or don’t trust yourself with it, then don’t get one. Simple. If you think they’re bad, then it may be worth reading on as you could be missing out on some interesting benefits.
Benefits of a credit card
Purchase protection
Anything you buy on a credit card has complimentary coverage against incidents like accidental damage, loss or theft. The coverage varies by provider (both item value and time period). A claim can result in either the replacement, repair or reimbursement of the item’s purchase price. This can be extremely helpful if a retailer isn’t being fair, or goes bust.
Low cost borrowing
There are many types of credit cards that have no or low-cost annual fees, or offer 0% interest. Used in the right way can save you $100s or even help with debt (e.g. using a balance transfer card).
Earn rewards
Some credit cards offers perks such as cashback, reward points and air miles. Used in the right way can save or make you $100s, even $1000s.
Improve your credit score
If you remain within your credit limit and pay back the balance in full (or at least the minimum) on time every month, you can improve your credit score. Lenders will view you as less risky, leading to better chances of being approved for other borrowing applications, such as a mortgage. You may even be offered lower rates too.
Things to watch out for
Avoid if you struggle with debt
If you know your spending habits mean you cannot afford to repay, a credit card can do more harm than good. If you’re already in debt, it would be wise to avoid increasing it with a credit card. Instead, see our debt help guide for other options that may be available to you.
The minimum repayment dilemma
If you only make the minimum payment every month, the interest on the outstanding balance will eventually build up. The amount owed could reach a point you can no longer afford and you could be in debt for years. It’s always best to pay off as much as possible.
It could harm your credit score for years
If you miss or make late payments, exceed your credit limit, this can damage your credit score. It shows other lenders that you are a risk and that they may not get their money back. This is important as such behaviors can remain on your credit file for years. This can impact future borrowing application approval or being given higher interest rates.
Which credit card is best?
You would assume all credit cards work the same way and make this a difficult question to answer. Depending on your circumstances or needs, the following points may help you understand which card could be right for you. Selecting the right card not only could save you money, but could also strengthen your financial standing.
| Do you spend on your card and always repay the balance in full? | A rewards credit card could save or make you $100s a year. |
| Do you already have a card that you are paying interest on? | There are two options available to you. A 0% balance transfer card as a first step because they provide the longest interest-free periods. The alternative is an all-rounder card which usually offer 0% on both purchases and transfers. If you continue spending, the all-rounder card is worth looking into. |
| Do you travel abroad? Or pay frequently in a foreign currency? | A specialist travel credit card can offer you excellent exchange rates and minimize, even remove fees charged by other credit cards. |
| Do you have a poor credit score? Or are new to credit and am struggling to be approved? | Credit building cards do exist, however the balance must be paid in full. By doing this and remaining within your credit limit, you can (re)build your credit score. |
FAQs
Can I get a credit card?
The only way to find out is applying to a card provider. That does leave a mark on your credit file which could impact your ability to get future credit. Before applying, it's worth checking your score first using a service like Borrowell to help you understand your chances of being approved.
What does APR mean?
APR stands for Annual Percentage Rate. This is the cost of borrowing.
A credit card offer will show you a "representative APR". This means a percentage of approved applicants will be given this rate. Other applicants could be given a different rate which may be higher. A lender must tell you what the APR is before you sign a credit agreement.
If you pay your card in full each month, you will not pay the APR. If you have a 0% balance transfer card, you will not pay the APR for the duration of the 0% period.
Can interest rates change?
The majority of credit cards have a "variable APR". This means the interest rate can go up or down and is dependent on market fluctuations. A lender will tell you if they intend to change the APR on your card.
It is possible to get a "fixed APR" card, where the rate won't go up or down for a fixed amount of time. These are rare and come with usually higher rates.
What is a credit score?
Lenders use a credit score to decide if they want to lend to you. They use credit reference agencies Equifax and TransUnion who have information about your credit history. Your credit application will also be used. If you've had any accounts in the past with them, that information will likely be used too.
What if my application for a credit card is declined?
Your application can be declined for many reasons. You may have poor credit history, or they believe you to be too risky to lend to. Unfortunately lenders do not have to tell you why they have declined your application.
If you've been declined, this will impact your credit score. It's always worth checking your score first using a service like Borrowell to help you understand your chances of being approved.
Essential information
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