I still remember the day I got my first credit card. I had just gotten a new job and I needed a bank account to pay my salary in. As I opened the account, the clerk gave me the additional option of a a credit card. I wasn’t sure how it worked exactly, but I was really excited about not having to pay for the stuff I would buy for up to 50 days! For free!
I have always been very credit averse and the only time I haven’t paid my credit card balance in full at the end of the month, was when I took advantage of 0% balance transfers and the money was earning me interest somewhere else.
On the other hand, credit cards can be dangerous to your financial health as some carry a very high interest rate if you can’t pay your balance off each month. It doesn’t seem like much, 2% every month or so, but it amounts to 20%+ per year! For every £100 you borrow, you end up repaying £120. That’s a lot of money you could put to much better use.
Am I ready to go and get my first credit card?
YES – You should absolutely get your first card in order to simplify your finances. Having a card puts all your expenses under one roof, you have one payment to make at the end of the month, and that’s it. Plus, you can usually sync the card with budgeting software that will compile your transactions and track your spending.
Having a first credit card will also help you build your credit, which is very important and will get you better mortgage rates the day you decide to buy a house. A 0.25% difference on a mortgage rate can end up costing you thousands of pounds over the life of the loan.
Having a credit card can also help you earn miles and rewards, or even cashback on your purchases. There are a lot of websites that will help you pick the best credit card for you based on your spending habits. Sometimes, it is worth paying a membership for the card in order to get free travel insurance or breakdown cover, but most people will be happy with just a cashback card.
NO – I just talked about how building your credit is very important for young adults, but being irresponsible with credit can damage your finances even more. The last thing you want is to overdo it with a credit card, which could ruin your credit for years.
You shouldn’t get a card until you are confident in your repayment abilities. That means you have a job, or a scholarship, or any other source of income that allows you to pay your balance off every month. Start with a card with a small balance and have a direct debit set up to pay the balance automatically, to avoid late fees and bad credit.
Credit cards are great. They make your life so much easier, and, if used properly, you can even get rewards and save a bit of money. But before you get your first credit card, make sure you understand all the implications.
It makes sense to have a thorough understanding of the status of your finances and what options are available to you, before you apply for any kind of borrowing. Make use of price comparison sites, such as Choose Wisely, for information on your own eligibility when it comes to credit cards, loans, bank account and prepaid cards.