Overview
A credit card provides you with a line of credit from a bank or other lender. It can smooth out the peaks and troughs in your budget, give you a convenient way to make payments all around the world, act as a safety net if you have unexpected expenses that you can't afford to pay immediately, and even improve your credit score if used responsibly. So it can be a good idea to have one.
But getting a credit card for the first time can be a challenge.
Credit history and credit score
Credit cards are more readily accessible when you have an established credit history with a proven track record of repaying on time. A credit card first-timer is handicapped as their history of loan repayments may be non-existent or very limited, and therefore may not provide a lender with the evidence of satisfactory credit management in the past. All lenders tend to take the view that the best predictor of future account conduct is past account conduct. Without a credit history to consider in your application they have limited information on which to base their decision. But your past payment record in other areas may help. If you are unsure of what your credit report contains, you can check it here.
Payment record
If you have used credit of any kind (such as a car loan) in the past and didn’t default on payments, your credit card application request will probably have a better chance of success. A landline telephone account, internet provider account, postpaid mobile phone account, gas or electricity account, can all help to establish your credit history if they are in your name.
Interest-free days
Credit cards allow you to use the card provider's money without paying interest for a number of days, as long as you always repay your account balance on full on or before the payment due date. The number of interest-free days is typically expressed as 'up to 44 days interest free' or 'up to 55 days interest free'. What this means is that if you were to make a purchase on the first day of your monthly billing cycle, you would be able to repay the purchase amount to the bank 44 or 55 days later, without incurring interest charges. On the other hand, if you were to make a purchase on the last day of your billing cycle, you would have only around 14 or 25 days of interest-free credit before payment was due.
Failing to repay your monthly balance in full means that you lose your interest-free days in the following month, and any new purchases will incur interest from the transaction date until the date you pay the bank for them.
Interest rates
Most credit cards will list two interest rates – the purchases rate and the cash advance rate. The purchases interest rate is applied to any purchases balance carried over from the previous month, when you have not repaid your account balance in full. The cash advance rate is applied to any cash withdrawals you make from your credit card account, either over the counter or at an ATM. There are no interest-free days on cash advances, so they always incur interest charges from the day you receive the cash until the day you make full repayment.
Not all credit cards permit cash advances. American Express cards, for example, do not permit cash advances unless you make a special arrangement, so no cash advance interest rate is quoted. Many cards have a cash advance rate that is slightly higher than the purchases interest rate, but sometimes the two rates are the same.
Interest rates are expressed as an annual percentage rate (APR) but are applied to your carried-over balance daily (by dividing the APR by 365), and the resulting interest charge is added to your account balance at the end of the monthly billing cycle. Purchase balance interest rates typically range between 10% p.a. and 21% p.a., but if you always repay your account balance in full when due you won't need to worry about the size of the interest rate on your card.
Credit score improvement
Once you have your first credit card, using it responsibly is one of the best ways there is to build up your credit history and improve your credit score. So always aim to pay on time (and in full if possible), stay within your credit limit, and try to avoid buying things you can't afford.
Alternatives to credit cards
Credit cards are far from being the only payment methods available to you. Here are some other ways to pay for your purchases, and how they compare with credit cards:
- Cash. Cash is becoming less and less common as a form of payment. It is inconvenient and risky to carry around, can't be used for online payments, and since almost all employee earnings are now paid directly into a bank account, it has to be removed from an account before it can be used.
- Personal loan. A personal loan has the advantage of charging interest at a much lower rate than a credit card, in the vast majority of cases. It will be a good choice for a single large purchase for a fixed amount (e.g. a car or major technology or appliance purchases). However, the disadvantages of a personal loan are that it may require security (i.e. collateral), the entire loan amount has to be drawn down at the beginning of the loan period, and it usually has to be repaid in equal instalments over a fixed term.
- Debit card. A debit card is linked to your bank transaction or savings account. Rather than using the bank's money to make purchases and repaying the bank later, you pay with the card using your own money. The main advantage is that you avoid the temptation to overspend and get into debt, but the drawbacks include missing out on interest-free short-term credit and the free rewards and benefits associated with some credit cards.
- Prepaid card. This works in a similar way to a credit card, in that you are using your own money. But instead of linking it to your bank account you preload it with a fixed amount of cash (e.g. $500) and top up the amount as required.
- Buy Now Pay Later (BNPL). Australia's best known BNPL services are Afterpay and Zip, but there are many more. Users sign up for a particular service, then use their BNPL account to make purchases and delay payment. The purchase amounts usually have to be repaid within a few weeks, but instead of being charged interest the account holder may have to pay substantial account fees and/or late payment fees. It has the advantage of being interest-free (much like a responsibly-used credit card) but it can be more difficult to keep track of purchases, easier to overspend and get into debt, and more expensive in the long run if you incur account fees or late fees. If you want to read more on this, we have a whole article where we compare Afterpay to credit cards.
The credit card application process
Once you have chosen the card that suits you best, the quickest and easiest way to apply is to do it online. If you choose to do it via Finty you'll be directed to the bank's website and online application form. You'll be asked to provide details, and in some cases documentary proof, about your identity, age (you need to be at least 18), citizenship or residency status, residential address, employment, income, and any assets and debts or loans you may have. It's a good idea to assemble all this information before you begin. Also make sure you check the eligibility criteria for the credit card you’re interested in before you apply.
You'll also need to think about how big a credit limit you need to apply for. A low limit – perhaps $500 or $1,000 – is recommended, until you get used to the idea of handling credit. You can apply for an increased limit later if you need it, although there are pros and cons to raising your limit.
While some cards advertise 'Instant approval' or '60 second approval', such approval is only conditional on the verification of the information you have provided. In practice it can take anything from a few business days to a couple of weeks before you receive a final decision, and for first-timer applications the approval process may take longer than it would for someone with a full credit history.
Once your account is approved, the physical card will usually be dispatched within five days, sometimes less, although a few card providers take as long as 6-14 days to mail out the card.
Transferring a balance to your first credit card
If you're about to apply for your first credit card, you will not have an existing credit card balance to transfer to a new card. But you could have a balance to pay off on a personal loan or store card, so you need to know about the promotional balance transfer deals offered to may new credit card users. In order to win your business, many card issuers will allow you to transfer to your new card your existing personal loan, store card or credit card balance, and pay no interest charges (or very low interest charges) on the balance for a fixed period of time. For example, you could transfer a balance of $5,000 from an existing card, where you were paying 20% p.a. on your debt, to a new card where you would pay no interest at all on the transferred balance for 12 months. The only requirement would be for you to make minimum monthly repayments (of, for example 2% of the declining balance) and in some cases to pay an upfront transfer fee of between 1% and 2.5% of the transferred amount.
You can save heaps in interest charges this way, and also get some breathing space in which to get on top of your debt. You can compare credit cards with balance transfers here.
(Note that the only credit cards allowing transfers of personal loan balances are those issued by Citi: Citi's own cards, plus Qantas Money, Virgin Money, Coles, and a few smaller card providers.)
