8 tips to follow with your first credit card
Your credit card can have a big impact on your credit score, in a positive or negative way, depending on how you manage your borrowing.
Understanding the key factors involved in credit health is essential to protect your credit score and avoid being charged added fees by your credit card provider.
To get the best out of your credit card and possibly improve your credit score, take note of the following tips:
1. Limit the number of credit card applications you make
With so many options available, it may be tempting to apply for multiple credit cards in a short period of time. However, this can negatively impact your credit score.
You see, in keeping with guidelines set by the Financial Conduct Authority (FCA), all authorised and regulated credit card providers must complete a creditworthiness assessment on anyone who makes a credit application. This 'hard search' will leave a footprint on your credit file, which will be visible for up to 12 months.
If you make multiple credit card applications, you run the risk of many hard searches being carried out, and this could damage your credit score.
Some credit card providers offer an eligibility checker, which will reveal how likely you are to be approved before you make a full application. This is usually done using something called a 'soft search' and will not harm your credit score or leave a mark on your credit file.
2. Keep within your credit limit
Your credit limit is the amount of money you’ve been approved to borrow on your credit card. Your credit limit is set by the lender and depends on factors such as your credit history and affordability.
If you exceed your credit limit, your transaction could be declined, and you may be charged a fee by your provider. Going over your credit limit could also hurt your credit score.
3. Maintain a low credit utilisation
Your credit utilisation reflects how much of your credit limit you’re currently using and is usually displayed as a percentage.
For example, if your credit limit is £500 and you make a purchase of £100, your credit utilisation will be 20% (as £100 is 20% of £500).
Higher credit utilisation could suggest financial difficulties or irresponsible spending. This, in turn, could cause your credit score to decline. Generally, it’s better to try and keep your credit utilisation below 30%. A credit utilisation above 50% could be detrimental to your credit score.
4. Avoid using your credit card to make a cash advance
A cash advance is when you use your credit card to withdraw money from a cash machine or at a bank.
Depending on your provider, you will typically be charged a cash advance fee, which could be between 2-3% of the transaction. You may also be charged additional fees if you use your credit card to make a cash advance abroad.
You should also bear in mind that the interest rate on a cash advance may be higher than on a standard credit card purchase.
5. Only spend what you need to or can afford to repay
A credit card should never be viewed as an incentive to spend money when you don’t need to, or that you can’t afford to repay. Making unnecessary purchases could increase your risk of falling into debt. To avoid impulse buying, you might find it useful to ask yourself the following questions before you make a purchase:
Can I afford it?
Is this a want or a need?
If it’s a need (such as a lawn mower, for example), could I borrow this item from a friend, family member, or community group instead?
Could I shop around and find it cheaper elsewhere?
Could I save up and buy it outright, rather than use credit? You might find that it helps to take a step back and wait a couple of days before you decide whether to make the purchase.
6. Pay more than the minimum repayment each month, if you can afford to
Remember, if you clear your balance in full each month, you won’t be charged interest.
On the other hand, paying just the minimum amount due on your balance will cause interest payments to creep up, which will affect your overall cost of borrowing and increase the amount that you owe.
Of course, you should never feel pressured to pay more than the minimum repayment amount if you can’t afford to, but where possible, you may wish to pay more to reduce the interest you’re charged.
7. Keep on top of your credit card repayments
It’s important to keep on top of your credit card repayments. Setting up a monthly Direct Debit can be a great way to ensure you don't forget.
Some providers may charge a fee for late or missed repayments, and in addition to this, your credit score will suffer.
If you’re finding it difficult to make your credit card repayments, you should contact your provider. Don’t wait until you’ve already defaulted on a repayment – reach out as soon as you think you might struggle to meet an upcoming repayment date. They will be able to discuss any available options that could help to reduce the financial pressure you’re facing.
If you’re worried about money or concerned about your level of debt, there are charities and organisations in the UK that offer free, impartial support, including MoneyHelper and StepChange.
8. Look out for promotional offers
Some credit cards may advertise an introductory offer, such as 0% in interest for a set amount of time.
But remember, if you haven’t repaid your borrowing in full by the end of the promotion, any outstanding balance will begin to accrue interest at your standard rate. Missing the end date on your promotional offer could be an expensive mistake.
If you manage your credit card effectively, following the tips above while also repaying any other credit agreements or bills on time, you could see an increase in your credit score.
For those hoping to establish or improve their credit score, a credit builder credit card could be an option to consider. This type of credit card typically comes with a manageable starting credit limit, which could help you keep on top of your spending.
This blog is for informational purposes only and does not constitute financial advice. Please speak to a qualified financial adviser before making financial decisions.