Applying for your first credit card? Here’s what you should know before getting one - MoneySense (2024)

Photo by Tim Douglas on Pexels

The convenience of making purchases with your credit card comes with many advantages, like rewards, perks and a solid credit history. However, if used irresponsibly, this financial tool can lead to unmanageable debt and a low credit score. So, how can you be a responsible credit card owner? I will explain how credit cards work, what to look for in a credit card, and the proper way to handle one.

How do credit cards work?

Having a credit card gives you the ability to make purchases or pay bills by borrowing money from the credit card company and paying it back by a certain date. It’s just like having a short-term loan. You are given a set credit limit and interest rates apply if you don’t make your payments on time and in full. Your card may come with special rewards and benefits that you can redeem, such as airline tickets or even cash back.

Why is a credit card important?

A physical (and digital) credit card can offer plenty of conveniences. For one, it is safer than carrying cash, especially if you are making a large purchase or like to have funds available for emergencies. On top of that, some credit cards may come with purchase protection for a certain period of time covering against accidental damage, theft or if the item purchased becomes lost.

If you are travelling abroad, it will give you peace of mind that Visa and Mastercard are universally accepted. Although, you will incur foreign transaction fees if you use it with a different currency. It’s also a good form of protection in that you may have certain types of insurance coverage such as travel insurance, medical insurance or car rental insurance. Your cardholder agreement and insurance certificates will outline what type of coverage you have.

What are the risks of having a credit card?

Although there are many wonderful perks that come with owning a credit card, there are also pitfalls to avoid. If you don’t pay careful attention to the details, you could wind up getting into a mountain of debt.

If you miss a payment or don’t pay off your balance in full every month, you will be subject to paying high-interest fees (typically around 19.99%). This can snowball into a large amount of debt, quickly. Ultimately, missing payments can harm your credit score, which will impact how much you can borrow from lenders in the future (say, when you need to take out a mortgage or car loan). To prevent this from happening, it’s wise to have enough money in your bank account to pay for your purchases and avoid impulse spending.

What are the benefits of having a credit card?

Unlike debit cards, credit card transactions are reported to the credit bureaus—Equifax and TransUnion—that monitor consumers’ credit scores. This helps you to build your credit history and determine your credit score. Another difference is that when using a credit card, you will be given a grace period to pay back the money you borrowed, whereas, with a debit card the money is instantly taken from your bank account.

It’s not always easy to know where your money goes. Having a credit card gives you the ability to keep track of your spending. This way you can see at a glance where you spend your money. If you find that you may be spending too much money on food and entertainment, you can take measures to cut down spending in that category.Many credit cards have tools to track these things in their apps and on their websites.

You have probably noticed that during the pandemic, many businesses have become cashless. For this reason, your credit card provides a convenient way to pay for things instead of carrying cash and coins. Plus, who really wants to fumble around trying to get the exact change to give to the cashier?

Smart ways to use a credit card

To become a savvy credit card user, there are a few strategies you can implement to stay on top of your finances.

First, you will want to pay your balance in full each month. That way you will avoid paying any interest charges (which can accumulate quickly). Whether you set a calendar reminder or automate your payments, it’s a good practice from the get-go.

Second, it’s important to keep your personal information private. Keep your credit card safe and try to limit the number of credit cards you carry. Do not share your personal identification number (PIN), security code (a.k.a. CVV number—card validation value—on the back of your card) or password with others, as you may be on the hook for unauthorized financial transactions. A good habit is to destroy any credit card statements you no longer need. You can also cut up old or invalid credit cards that no longer serve you.

It’s shocking to see that Canadians have been victims of fraud and have lost $163.9 million, according to the Canadian Anti-Fraud Centre. There are many sophisticated phishing emails, text messages and phone calls that without being vigilant, may appear to be from a real company. Be on guard and beware of any suspicious links and do not share your credit card information.

With that said, check your statement for any errors. Especially in times of fraud, you may find a suspicious charge to your credit card that could be easily overlooked. You can log in to your bank account and check regularly for any mistakes. If you notice anything odd, you can freeze your credit card and ask the financial institution to investigate further.

Avoid making these costly mistakes

In order to keep a good track record, you will want to steer clear of the following behaviours that could put a damper on your finances: Don’t skip payments, pay only the minimum payment or carry a balance. These incur hefty interest charges and will be documented in your credit report. As well, you don’t want to max out your credit limit because it may be a sign that you are overspending. Besides, it’s not fun looking at your credit card statement and seeing that you owe a large sum of money.

Now, store credit cards may be tempting, especially if you enjoy shopping at a particular store regularly. The issue with these types of cards is that they often charge higher than average interest rates. What’s more, it also may bring out the shopaholic within you, causing you to spend more than you anticipated just to receive a discount. If you are going to sign up for a retail credit card, remember to stick to your budget and set up automatic payments so you don’t get dinged.

How to choose the right credit card

There are a wide variety of credit cards to choose from. The key differences to look out for are the interest rates, fees along with rewards and benefits.

Comparing interest rates

Interest rates may be an important factor for you if you don’t pay your balance in full every month. The good news is that plenty of credit cards offer low interest rates. Some may charge an annual fee, but it may be a better option than paying a higher interest rate.

On the other hand, be careful of introductory low interest rate offers, which are only applicable for a limited time. Read the agreement carefully, so you understand when the low interest rate will end, what the standard interest rate will be and if there are any other conditions.

Fee vs no fee

There are certain credit cards that charge an annual fee that comes with one-time bonuses or special benefits. For example, you may pay an annual fee of $120 for a special frequent flyer credit card that comes with airport lounge access.

You will have to determine if the annual fee is worth the rewards you receive. If not, there are many credit cards that do not charge an annual fee and offer similar benefits. For several years, I paid an annual fee of $100 for a cash back credit card as I made some large purchases and received up to $500 in cash back at the end of the year. During the pandemic, the fee increased to $120 and my spending was reduced dramatically. It no longer made sense to continue using this card, so I switched to a no annual fee credit card where I could collect Aeroplan points instead.

Rewards and benefits

A rewards card can provide you with cash back on your purchases or offer discounts on products and services. If you love to travel, you may be enticed to get a frequent flyer card. Or, if you frequently rent a car to go on road trips, then you may opt in for a card with car rental insurance. Maybe you enjoy earning points for every dollar you spend at a particular grocery store. If you are still in school, you can consider student credit cards where you can build your credit history

When choosing the right credit card, you will need to determine how often you plan to use the benefits, how long it will take you to earn a reward and if you have access to these benefits through another method (such as another credit card, your employer, or an alumni group benefits). Be sure to read and understand the fine print because there may be restrictions that may hinder the total value of the rewards and benefits you will receive.

Credit card alternatives

There are other ways to borrow money have offer lower interest rates than a credit card. You may consider a secured credit card, which requires a security deposit. It’s a good way to build (or rebuild) your credit history.

Another option is to use Visa Debit, which allows you to pay for items directly from your chequing account. It’s a great method to use if you want to prevent the accumulation of debt. A benefit is that is widely accepted in over 200 countries.

A growing trend is the use of prepaid credit cards where you preload the card with your own money and use it as a credit card. However, it doesn’t allow you to build your credit history as no money is being loaned to you. It’s a good choice for those who have a diminished credit score or aren’t able to get a traditional credit card.

Spend responsibly

Now that you know the risks and rewards of having a credit card, you can take the steps to minimize the threat of it harming your finances, all the while taking advantage of the benefits. With rewards, purchase protection and an opportunity to build your credit history, there are many reasons why owning a credit card can benefit you in the long run.

Video: Promotional rates: What to look for in the fine print

More onfinancial literacy:

• Struggling with student debt? Here’s how to pay off student loans faster
• 6 money lessons I wish I knew in my 20s
• 5 money fears from childhood—and how to overcome them
• How to start an emergency fund