Choosing your first credit card can be tricky and you may find it complicated or confusing if you’ve never had one before. So it’s important to learn the basics first.
First credit cards, also known as ‘credit building cards’, or ‘cards for bad credit’, are specifically designed for people who have yet to establish a credit history, or have a credit history that needs repairing. These cards tend to be more inclusive and have more relaxed eligibility criteria than their more traditional counterparts. For example, annual income requirements tend to be lower, and your current employment status will be less of a sticking point.
The application process for a first credit card is simple and can be completed online by filling out an application form and submitting some forms of ID. Some credit card issuers offer an eligibility checker, where you can check the likelihood of being accepted before you officially apply, which will not show up on your credit history. Generally, as a credit card first-timer, you will be asked to provide such information as:
Your address (or addresses over the past three years). If you haven’t already, make sure you register on the electoral roll at your current address to increase your chance of success.
Your date of birth
Your annual income
Details of your employer (if you are employed)
Your current account details
A valid email address and/or telephone number
Because credit card issuers have no idea about your past behaviour with credit, first credit cards tend to be more restrictive in their use – at least initially. For example:
First credit cards typically come with a lower credit limit, usually between £100 and £1,200. Some issuers will allow you to increase this limit slowly over time, providing you have proven yourself to be responsible with your spending and repaying.
Because of the credit card issuer’s perception of your financial risk, APRs on first credit cards are generally higher than more conventional cards. Furthermore, some credit card issuers offer alternative (even higher) APRs if you are not considered eligible for the card you applied for. This is known as ‘personal pricing’ or ‘downsell rates’. If you consider that making multiple applications for credit in quick succession harms your credit rating, it may be worth applying for cards which have an eligibility checker, so that you can determine which rate you will be subject to before you officially apply.
It’s not all bad news though. First credit cards come with a whole host of helpful tools to aid you in coping with your everyday finances, and with your quest to build a good credit history. These can include:
This can be extremely useful, as you can see exactly what any credit card issuer can see. You can keep a constant check on your credit file to ensure all the information is correct, and you can see your credit improving over time.
These are available with almost all first credit cards and can help you manage your finances even when you are on the move. You can check balances, pay bills and set up or amend direct debits or standing orders.
These can be set up to warn you of any outgoing payments, or to alert you when you are nearing your credit limit.
Some issuers will give you the option of moving your monthly repayment date. This can often be more than once a year – to a day more suitable for you.
Payment holidays aren’t common*, but they are offered by some card issuers. Put simply, they let you skip a month’s credit card repayment – but be warned that they’re not automatically granted, so you should contact your credit card issuer in good time before you miss your payment.
*Due to COVID-19, card issuers will allow a payment holiday of up to 6 months to help with changed financial circumstances.
First credit cards can offer benefits and rewards, albeit on a smaller scale to more conventional credit cards as users are yet to improve themselves. Such rewards can include:
Cashback – Cashback will probably be paid at a low rate and may be capped to a certain amount per year, but such cards can reward you for simply spending on your credit card. You should look to see what rate of cashback is paid where, as many cards will pay different rates depending on where you use your card.
0% balance transfers – While only offered for a comparatively short period of time, some first credit cards offer 0% interest balance transfers. There will be a fee, though – usually 3 to 4% of the amount being transferred.
0% purchases – Again, 0% interest on purchases is usually only offered for a short period of time.
Money transfers – This lets you transfer money from your credit card to your current account. There is a fee for this service, typically around 4 to 5%.
Loyalty points – There are first credit cards which offer points as a reward for simply spending on your credit card.
No fees when spending abroad – This is especially helpful if you plan to take your card away on your holidays, as those transaction fees can mount up.
There are some important dos and don’ts with first credit cards – first and foremost to improve your credit rating, but also to avoid unexpected and unwanted fees and charges.
Try to pay off your balance in full every month. Your credit record will show your timely repayment of debt, and you won’t ever be subject to a high rate of APR. If paying off your entire balance is not possible, then pay off as much as you can afford every month.
Make all of your repayments on time. Failure to do so will not only harm your credit rating, but your credit card issuer will retract any special introductory offers or benefits that the card came with. It is always advisable to set up a direct debit from the outset, to save you having to remember to make the payment every month.
Make the most of all the financial tools your credit card has to offer, including budgeting tools, setting up reminders for payments, checking your credit history regularly, and taking positive steps to improve your credit file. Get yourself into good habits from the outset, and you will be laying the foundations for good financial management in the future.
Your ‘utilisation ratio’ (your outstanding debt vs. the total amount of credit available to you) is a major factor to credit card issuers when you are applying for further credit in the future. Ideally, you should keep the utilisation ratio between 30 and 40%. It is always best practice to spend on your card, then pay it all off (or as much as you possibly can) before you spend again.
The APR charged when you repay this money is often much higher than your standard APR – up to 10% higher!
Unless your card comes with free foreign transactions, using your first card for purchasing items abroad incurs a fee every time, as does taking money out from a foreign ATM.
If you spend and repay wisely with your first credit card, ensuring that you remain well within your credit limit and repay at least your minimum repayment every month without fail, you will establish an official record of good financial management. The positive effect that this good credit history can have on your future should not be underestimated. It will not only give you access to more rewarding credit cards in the future, but also other competitive financial products such as loans, current accounts and mortgages.
The coronavirus outbreak is affecting everyone around the world and has put a financial strain on many. If you currently have your first credit card and are struggling to meet your minimum payments, help is at hand.
Measures have been introduced by the Financial Conduct Authority (FCA) that allow you to request a freeze on credit card repayments. This is to give those experiencing a change in financial circumstances due to COVID-19 some breathing space. This won’t leave a bad mark on your credit history due to the exceptional circumstances.
You can apply for a 3-month payment holiday, which can be ‘topped up’ to a total of 6 months; you have until 31 March 2021 to request your payment holiday. Make sure you’ve agreed to it with your lender before you stop paying!
If you can afford to make repayments it’s best to do so, as you will still be charged interest during this holiday period. You might end up paying more in the long run so only request it if you really need it.
A credit card can be a great vehicle for demonstrating good financial management skills, and in time can improve your credit rating to a point where you can apply for more conventional (and potentially rewarding) credit cards. However, it is not enough simply to own a card. You need to spend on the card regularly and repay at least your minimum payment promptly every month, or even better, pay off the balance in full. If you aim to improve your credit score, rather than to use your card for credit, it makes sense to use your credit card for things you would normally use your debit card for (shopping, fuel etc.), then pay off the credit card balance with money from your bank account. That way, you have not spent any more, but the credit card issuer has reported back to the credit reference agencies that you are regularly borrowing and making successful repayments on time.
Because credit card issuers have no history of your previous financial management skills, they are taking a risk offering you a card. This is because if you default on your payments, the credit card company will lose money. The APR on credit cards for those new to credit reflects this level of risk.
If a card’s APR is advertised as ‘Representative’, then this means that only 51% of their customers have to be offered that rate, leaving the remaining 49% being offered a potentially lower rate. Some credit card issuers (though not all) offer ‘downsell’ rates, which are alternative, less favourable rates which could be offered if you are unsuccessful in obtaining the best rate.
If you don’t want to take out a credit card, or you have been refused, you could consider a credit building prepaid card. These cards don’t require a credit check, so any UK resident over the age of 18 would be accepted. Furthermore, the monthly fees that you pay for such a card are treated as a loan repayment and are reported back to the credit reference agencies as such. In this way, you should see your credit rating improve over time.
Yes, outside of using a credit card responsibly, there are several things you can do to help push your credit score in the right direction:
Check your score. Check your credit history with one of the credit reference agencies (Callcredit, Experian or Equifax), to ensure that all the information on it is present and correct. If you notice anything suspicious on your file, contact the particular agency immediately and ask for it to be rectified.
Get on the electoral roll. Make sure you are registered on the electoral roll so that any potential lenders can confirm who you are and how long you have lived at your address.
Get a bank account. A good financial history with a bank is another way to demonstrate that you are financially savvy.
Pay some bills in your name – on time and in full. If, for example, you have a mobile phone contract in your parent’s or partner’s name, take one out in your own name (when your current contract has expired), so that you can demonstrate that you can repay debt responsibly. Set up a direct debit so there is no risk of you forgetting to pay.
If you demonstrate that you can borrow and repay responsibly – i.e. you stay within the credit limit and repay what you owe on time and in full – you should see an improvement in your credit score within around three months. If you plan to apply for another credit card, it would be advisable to wait around 6 to 12 months, so that your credit history does not show too many credit card applications in quick succession.