Your Debt Threat

Being approved for your first credit card is quite a milestone, as it’s your first step towards establishing your credit history. If you ever plan to buy a house or obtain finance to buy a car, you’ll need a decent credit record – and a well managed credit card account can help you to achieve just that.

There are many traps you can fall into, however, when presented with your first piece of fantastic plastic. The golden rule – which is often more difficult to stick to than you’d think – is if you can’t afford it, don’t buy it. You should only charge items to your card if you know that you can afford to pay off the balance at the end of the month, or at least within a realistic time frame. This is where most people run into trouble, because they use credit cards to live beyond their means.

If you keep that principle front of mind and stick to these rules, you should have no trouble managing your first credit card:

Reward yourself, not the bank

Most credit card providers charge an annual fee, and the fee is usually higher if the card is attached to a reward programs. In the beginning, you’re probably best off avoiding rewards programs altogether; might find that you’re actually paying £79 a year for the rewards program, to end up with a “reward” of a magazine subscription worth £20.

Know your limits

Start small, with a credit limit of around £500, while you get used to managing a credit facility. Always make your monthly credit card payments on time, and try not to exceed your credit limit. Late payment and over-limit fees are completely avoidable, and they can quickly erode your available credit.

Transactions only

Use your credit to pay for products and services only – if you withdraw cash from your credit card account, you’ll be charged exorbitant interest on that withdrawal from the minute it’s drawn from your account.

Think short-term

Credit cards offer a convenient way to pay for bills, services and small purchases, but they are not a cost effective form of funding for long-term borrowing. The interest rate on a credit card is higher than for any other type of loan, so consider the account to be a short-term solution – not an opportunity to buy a plasma screen TV or similar big-ticket item.

Shop around

Don’t go with the first credit card you see – every card has different features, rates and restrictions, so look for a card that best suits your needs. If you plan to pay off your balance each month, interest rates won’t be of much concern, but if you don’t think you’ll pay it in full every month, then you’ll want a low interest rate credit card.

Ask questions like: If I have any other accounts with your bank, do I get any fee rebates on my credit card? What’s the current interest rate? What is the annual card fee? Is there are a reward scheme, and if so, what is the cost? Is interest charged from the date of purchase, or from the date that the statement is issued?

Utilise the interest-free period

Many credit cards offer an interest-free period of between 44 and 55 days. If you have 55 days, for example, this means that if your statement period runs from 1 June to 31 June, you have until 25 July to pay the balance, before interest is charged. To avoid paying interest on your purchases altogether, you must pay the full closing balance by the due date on your statement, so this allows you a few extra days to make repayments before interest is charged.

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