Setting Up a Credit Card (With Pros and Cons)
Credit cards can be helpful for managing your finances, but it’s important to understand how they work, their pros and cons, and how to use them responsibly. This guide provides an accessible step-by-step process for setting up a credit card, understanding key terms like APR, and ensuring you can pay off your credit card in the UK.
Here's a step-by-step guide to help you with setting up a credit card.
Understand What a Credit Card Is
A credit card allows you to borrow money to pay for things, with the expectation that you’ll repay it later.
How It Works:
The bank gives you a credit limit (the maximum amount you can borrow).
You use the card to make purchases or pay bills.
You receive a monthly statement showing how much you owe.
You pay back at least the minimum payment (or ideally, the full amount).
Key Terms Explained:
Credit Limit: The maximum amount you can spend using the card.
Example: If your limit is £1,000, you can’t spend more than that.
Minimum Payment: The smallest amount you must pay each month.
Example: If you owe £200, the minimum payment might be £10.
APR (Annual Percentage Rate): The interest rate charged on your balance if you don’t pay it in full each month.
Example: If your APR is 20%, you’ll pay £20 annually for every £100 of unpaid balance.
Decide If a Credit Card Is Right for You
Before applying, think about why you need a credit card.
Pros of Credit Cards:
Convenience: Use it to pay for things online or in stores.
Emergency Funds: Cover unexpected expenses (e.g., car repairs).
Build Credit Score: Making payments on time improves your credit rating.
Buyer Protection: Purchases over £100 are protected under UK law (Section 75).
Cons of Credit Cards:
Interest Charges: If you don’t pay the full balance, you’ll pay interest on the remaining amount.
Risk of Debt: Overspending can lead to financial difficulties.
Fees: Some cards charge annual fees or penalties for late payments.
Example Scenario:
If you can pay off your balance every month, a credit card can help build your credit score and provide flexibility.
If you’re likely to overspend, it might not be the best option.
Research Credit Card Options
There are different types of credit cards for different needs.
Types of Credit Cards:
Standard Credit Cards: For everyday spending.
Example: Barclaycard Forward (no annual fee).
Rewards Cards: Earn cashback or points on spending.
Example: American Express Platinum Cashback.
0% Purchase Cards: Pay no interest on purchases for a set period.
Example: Tesco Bank Purchases Card (0% interest for 12 months).
Credit Builder Cards: For people with little or poor credit history.
Example: Aqua Classic or Vanquis Bank.
Tools to Compare Cards:
MoneySuperMarket: Compare credit cards by interest rates, perks, and fees.
Which?: Trusted reviews of UK credit cards.
Gather the Documents You’ll Need
To apply for a credit card, you’ll need:
Proof of Identity: Passport or UK driving licence.
Proof of Address: Recent utility bill, council tax bill, or bank statement.
Income Information: Proof of your salary or benefits (e.g., payslip or benefits statement).
Apply for a Credit Card
You can apply online, over the phone, or in a bank branch.
Steps to Apply:
Fill Out the Application: Provide your name, address, income, and employment details.
Example: If applying for Barclaycard online, the form will ask for your annual income.
Submit Documents: Upload or bring your ID and proof of address.
Wait for Approval: The bank will check your credit history and decide if you’re eligible.
What If You’re Rejected?
Ask the bank why you were declined.
Consider applying for a credit builder card, which has fewer requirements.
Understand Your Credit Card Statement
Once approved, you’ll receive a monthly statement showing:
Transactions: What you’ve spent.
Balance: How much you owe.
Minimum Payment: The smallest amount you must pay to avoid penalties.
Payment Due Date: The date by which you must make a payment.
Use Your Credit Card Responsibly
To avoid debt, it’s important to manage your spending and repayments carefully.
Practical Steps to Try:
Set a Spending Limit:
Keep your spending below 30% of your credit limit.
Example: If your limit is £1,000, try not to spend more than £300.
Pay the Full Balance Monthly:
If you pay your balance in full, you won’t pay interest.
Example: If you owe £200 and pay it all off, you avoid interest charges.
Set Up Direct Debits:
Automate your payments to avoid missing due dates.
Track Your Spending:
Use your bank’s app to monitor transactions in real time.
Plan for Payments
Making regular payments ensures you avoid interest and maintain a good credit score.
How to Plan:
Budget for Payments:
Include your credit card payment in your monthly budget.
Example: If you owe £100, budget £100 to pay it off by the due date.
Pay More Than the Minimum:
Paying only the minimum means you’ll pay more in interest over time.
Example: If your balance is £500, paying just the £10 minimum will take years to clear.
Be Aware of Fees and Charges
Understand what might cost extra on your credit card.
Examples of Common Fees:
Late Payment Fees: Charged if you miss a payment.
Example: £12 late fee for missing the due date.
Cash Withdrawal Fees: High fees and interest for withdrawing cash.
Example: £5 fee + 30% interest for withdrawing £100.
Foreign Transaction Fees: Extra costs for using your card abroad.
Get Help If You’re Struggling
If you find credit cards confusing or hard to manage, ask for support.
People Who Can Help:
Bank Staff: They can explain terms and help you set up your account.
Support Workers or Trusted Friends: They can guide you through the process.
UK-Based Resources:
MoneyHelper: Free advice on managing credit. Visit www.moneyhelper.org.uk.
StepChange: Free debt advice. Visit www.stepchange.org.
National Autistic Society (NAS): Offers support with money management. Visit www.autism.org.uk.
Apps to Help Manage Your Credit Card
Emma: Tracks your spending and reminds you of payment dates.
Cleo: A chatbot that helps you budget and manage your money.
Your Bank’s App: Most UK banks offer apps to monitor transactions and set spending alerts.
Practice Self-Compassion
Using a credit card responsibly is a skill that takes time to learn.
Tips:
Celebrate small wins, like making your first payment on time.
If you make a mistake (e.g., forgetting a payment), focus on what you can do to fix it and learn for the future.
Example Scenario: Using a Credit Card
You apply for the Barclaycard Forward, which has an APR of 34.9% but no annual fee.
You receive a £500 credit limit and buy groceries for £50.
Your monthly statement shows £50 due. You pay the full amount by the due date, avoiding any interest.
Final Thoughts
By following this guide, you can set up and use a credit card confidently while avoiding common pitfalls. Don’t hesitate to seek support or use the suggested tools and resources to make the process easier.