We aren’t taught enough about credit cards (or money in general) when we’re at school. It can feel like credit card money comes from a bottomless well of funds unless someone explains how credit works. Flying blind in the world of money can cause costly mistakes, some of them serious (and not something mum and dad can easily fix).Before you apply for any kind of credit (which is when you borrow money of any kind, like a home loan, personal loan, or a line of credit with a credit card), you should educate yourself. We’ve made it easy with these top 7 must-know tips for first timers.

Tip #1. Being given credit is not an invitation to start spending

When you apply for a credit card, your card provider will assign you a credit limit. This limit will be based on a number of factors, including your credit history, your employment status and your income. For most first-time credit cardholders with limited credit history, their credit limit will typically be quite low, ranging from $500 to $1,000.

Regardless of how high or low that limit is, it’s important to remember that just because it’s there, doesn’t mean you have to spend it. When we first get a credit card, that notion of having ‘free money’ often encourages us to spend, giving us permission to spend even if we know we can’t pay it all back. However, this can lead to some serious problems if spending keeps stacking up.

Shop cards for first timers

Instead of thinking of your credit limit as ‘free money’, consider each purchase before you make it. Unless you know you can pay off those purchases at the end of the month, don’t make them. So, put that that MAC lipstick back on the shelf and remove that PS4 game from your cart. If you don’t have the money to cover it, your credit card should stay firmly in your wallet.

If you’re having trouble with overspending, a spend tracker app could help. Using this in conjunction with your banking app, you’ll be able to track your spending while keeping tabs on how much you have available to spend. You could also create a budget so you know exactly how much you can afford to spend on extras, letting you splurge when you can afford it.

Tip #2. Different cards suit different cardholders

Some credit cards are more exciting than others. While some simply offer access to credit, others offer the opportunity to earn rewards while accessing enticing features such as airport lounge passes, VIP event invitations and hotel stays. You want the more exciting option, right? Unfortunately, while they may seem appealing, these higher end cards don’t typically suit first-time cardholders.

One thing many first-time cardholders are drawn to is rewards. In an ideal world, rewards cards would work for everyone. They would let you earn heaps of incredible rewards simply for spending on your card. In the real world, however, rewards don’t come for free – and they don’t usually suit smaller spenders.

With a rewards card, you will pay an annual fee. If this annual fee is $90, you would have to earn rewards worth more than $90 each year just to make it worth your while. If your card provides rewards equal to 1% of your spending, your annual spend would need to be $9,000 just to break even. And, if you ever carry a balance on your card and pay interest, you would have to work even harder to see any value from your rewards.

Rewards cards tend to work best for cardholders who channel a large spend through their card, and then pay it all off at the end of each month. As a first-time cardholder, it might take some time before you are able to do that, so in the meantime, it would be best to stick to a simple, no frills card that helps you keep costs down.

Tip #3. You can use your credit card to build your credit

According to a survey (1) released last year by consumer education website CreditSmart, many young Australians are unsure about credit reporting and how it affects them. The survey showed that 44% of millennials are unsure of the difference between a credit score and a credit report, and more than half are unaware of what a lender looks for in a credit report.

While it may not affect them too much in the short term, this lack of understanding could cause problems later on down the line. Someone who doesn’t understand credit reporting may make no effort to build their credit over time, or worse, may make mistakes that cause them to have bad credit, making it difficult to get approved for a car loan or mortgage when they’re older.

Applying for a credit card – and using it responsibly – can help you to build your credit score. If you have a credit card, your credit score will be positively affected if each month you make repayments on time. According to Experian, one of Australia’s three main credit reporting bureaus, payment history is one of the top factors in most credit scoring models and accounts for 35% of a credit score (2).

Other ways to improve your credit include limiting your credit applications (as numerous credit applications can be an indicator of financial stress), and reducing your credit card limits. Why? If you have a number of credit cards with high limits, it increases your potential for risk. With all that spare credit, lenders see that you could spend up to those limits and get into trouble financially.

In terms of managing your credit score, you should regularly review your credit history to make sure everything in your credit file is accurate and up to date. You can apply to have errors corrected with the appropriate credit reporting agency. Managing your debt wisely can also help you maintain your credit, preventing you from getting over your head and missing repayments.

How bad is bad credit? A default will stay on your credit report for five years, while a late payment will stay on your credit report for two years. The more late payments on your credit report, the more your credit score will drop. Even declined credit applications take their toll. This is especially important to remember for first-time cardholders.

When you turn 18, you will likely start receiving invitations to apply for all sorts of credit cards by your bank, and in some cases, other lenders. These invitations may make it seem like you are already approved, and all you need to do is fill in a few details to apply. However, you still need to meet the eligibility requirements of the application. If you don’t, your application will likely be declined, and this will be recorded on your credit file.

The good news is that negative items on your credit file fall away over time. If you make mistakes, you can work on balancing them out with responsible behaviour. Making your credit card repayments on time, paying off your balance in full and being smart with your spending should help you build up your credit over time, making it easier to get approved for big ticket credit applications, such as a mortgage in the future.

Tip #4. Cash advances are not the same as debit card withdrawals

While it may look similar, withdrawing money on a credit card is not the same as accessing money from your current account using your debit card. As the name suggests, a ‘cash advance’ provides you an advance in cash. Just as a purchase on your credit card advances you credit, cash withdrawn on your card provides access to money that is not actually yours. It’s your lender’s.

Your lender will allow you to ‘borrow’ money using your credit card using the cash advance feature, but it comes at a cost.

• You will usually pay a higher rate of interest on cash advances, up to 25% p.a. depending on the card.
• You will usually pay a fee for each cash advance.
• When you take out a cash advance, there are typically no interest free days on that transaction, which means that high rate of interest starts to accrue from day 1.

It’s best to avoid cash advances whenever possible. Just pretend the feature doesn’t exist.

Tip #5. You can avoid fees and costs by making smart decisions

Aside from receiving invitations to apply for credit cards through the post, you may find temptation to apply elsewhere as well. Credit card providers may set up shop at college and university orientation weeks, offering sign-up bonuses such as t-shirts, pens and hats to unsuspecting students starting their journey into tertiary education.

If you have looked at credit cards online, you may soon find your social media feed clogged with credit card ads, most likely unsuited to your needs. These ads show feature-packed cards with enticing introductory offers, which usually have high annual fees and interest. But, what you may not know as a first-time cardholder is that credit cards don’t have to be expensive.

By choosing the right card, and dealing with it responsibly, you could access credit for free.

Interest: You can avoid interest by shunning cash advances, and by only spending what you can afford to pay back at the end of each month. Choosing a card with up to 44 days or 55 days interest free, you can avoid interest accruing by always clearing your balance by the due date.

Annual Fees: By choosing a card with no annual fee, you can avoid that yearly outgoing to save money. These cards are typically no frills, but this can make it easier for you to manage as you get used to dealing with credit.

Other Fees: If you check the small print, there will be plenty of potential for fees. However, by being smart, you can avoid most of these fees altogether. By making your repayment on time each month, you can avoid the late payment fee. By not going over your credit limit, you can avoid the over-limit fee. By shunning cash advances, you can avoid the cash advance fee. And so on.

Tip #6. Don’t just make the minimum payment

On your credit card statement, it will tell you what your minimum payment is. This is the minimum payment you must make to avoid getting a late payment fee or a default on your account. Varying according to the card provider, the minimum payment will either be a fixed amount, such as $20, or a percentage of the balance, which is usually 2-3%.

Changes to the way statements are provided now mean that card providers need to tell you how much it would cost in interest and how long it would take to pay off your current balance if you were only to make the minimum payment. By taking time to check that out, you will see why it’s not a good idea to only pay the minimum.

Sometimes, paying only the minimum can cost hundreds or even thousands of dollars in interest, leaving the cardholder in debt for years, or even decades. While we know it’s not always possible to pay off your balance in full, try to pay as much as you can, and then pay it all off the following month.

To make it easier to remember, you could set up auto-pay so you never have to worry about missing a payment. This could be arranged for the day after your payday, so you know the money will be ready in your account.

Tip #7. A balance transfer offer is not a ‘clean slate’

Balance transfer offers are common in the credit card world, but they should not be thought of as a ‘get out of jail free card’. Used correctly, a balance transfer offer can be used as a tool to pay down debt. But, that doesn’t mean you should overspend on your current card because you think you can clean up the mess with a balance transfer afterwards.

Here’s how a balance transfer works:

• You find a balance transfer offer that works for you. A 0% balance transfer offer is usually best, offered over a period of time that allows you to pay off your debt.
• Making sure you are eligible for the card, you complete the application, providing details of the balance to be transferred.
• After approval, your new card provider will arrange the transfer, but it’s up to you to close the old card account. Closing this account removes the temptation to spend more on the old card.
• Over the introductory period on the new card, you pay off your transferred balance, with the best result being your debt is completely paid off before the intro period ends.

However, dealing with a balance transfer doesn’t always run as smoothly as that. Here are some problems that can occur:

• Your card charges a balance transfer fee, which you will have to pay off alongside your transferred balance.
• Your card only allows a balance transfer up to a certain percentage of your approved credit limit. This leaves you with debt to pay off on both the old card and the new card, making it more difficult to manage.
• You don’t close the old account and continue to spend on it, racking up more debt that you can’t pay off.
• You spend on the new card, making it difficult to pay off the new spending and the transferred balance. On top of that, interest free days sometimes don’t apply to new spending when there is a balance transfer on the card, so interest starts accruing from the date of the transaction.
• You fail to pay off the transferred balance before the intro period ends. The remaining balance reverts to the card’s purchase rate or, worse, the cash advance rate, making it harder to pay off as interest accrues.

As you can see, balance transfer offers are not an easy solution. While they can help you to pay off your credit card debt with hard work and good budgeting, they’re not something you should rely on as an excuse to overspend.

1. https://www.creditsmart.org.au/news/millennials-score-low-when-it-comes-to-credit-awareness/
2. https://www.abc.net.au/news/2019-05-03/your-credit-score-reflects-your-financial-behaviour/10987788