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12 Important Facts to Know Before Applying for a Credit Card

6 minute read

By Hannah Stephens

A credit card allows you to make purchases and withdraw cash using borrowed money. These products can give you more financial freedom, but they’re also a major financial commitment. Credit card debt can get expensive if you don’t keep on top of your payments, so they’re only an appropriate option if you’re good at managing money.

Credit card interest rates, benefits, and fees vary widely across products and providers. Also, you won’t necessarily be eligible for every card. Furthermore, the large number of card types available can make choosing a credit card a confusing experience, especially for first-time borrowers.

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The following facts can help you choose the right credit card for you with confidence.

1. First-Time Applicants Have Limited Options

You probably don’t have a credit rating if you’re applying for a credit card for the first time. A credit rating is a score based on various factors, including your previous borrowing history, that allows companies to assess your credit-worthiness.1

You’ll usually have limited options when you take out your first credit card because lenders can’t use your credit score to work out the risk of lending to you. There are plenty of credit card options available for first-time borrowers, but you probably won’t have access to the best interest rates and perks. Using your first credit card sensibly and keeping on top of monthly payments can help you access better products in the future.

2. Some Credit Cards Offer Added Benefits

Some banks and lenders offer added benefits for certain credit cards. These cards usually charge higher interest rates or fees, so they’re not usually a good option unless you can afford to repay the balance in full each month.

Potential benefits include:

Many banks and lenders restrict how customers can receive or use rewards earned on their credit account. For example, you may have to meet minimum spending requirements to qualify for cashback.

3. Applying for a Credit Card Affects Your Credit Score

Bear in mind that applying for a credit card will affect your credit score, even if you’re refused credit. This is because the bank or lender will carry out a credit check to assess your risk level. These inquiries appear on your credit card and usually lower your credit rating slightly.3 Therefore, it’s best to avoid applying for multiple credit accounts over a short period.

If you’re worried about a credit inquiry lowering your credit score, some lenders offer instant decision credit cards. In these cases, the lender will perform a “soft” credit check. This check will appear on your credit report but will not impact your rating. It will estimate your chances of a successful application. However, you’ll likely need to undergo more thorough checks, including a full credit check, if you decide to pursue it.

4. A Credit Card Can Help Build Your Credit Rating

Some banks and lenders offer credit cards designed to help you build your credit rating. These cards can be good options for first-time borrowers or people who have a poor credit rating. Some companies will even consider customers with bankruptcies or a County Court Judgement on their credit file.4

Using a credit card to make small purchases and paying the balance back the same month can help show companies that you can handle debt responsibly. Therefore, getting a credit builder credit card could help you get better APR rates and benefits in the future and make it easier to access other types of borrowing.

Credit builder credit cards tend to come with higher interest rates, so it’s best to only spend what you can afford to repay each month.

5. Interest Rates Affect What You Pay

Creditors charge interest on your card balance known as an annual percentage rate (APR). Lenders calculate APR over 12 months, so consumers can understand how much they’ll pay on their balance each year.

As of 2020, the average interest rate across all UK credit cards was 20.77 percent. Some low-rate cards offered rates of just 6.4 percent, while the average rate for a credit builder card was 35.2 percent.5

6. Representative and Actual APR Rates Can Differ

Creditors use representative APR rates to advertise their products. However, that doesn’t mean that every applicant is eligible for this rate. 51 percent of customers must pay the representative APR rate or lower for a company to use it for advertising.

As such, you might get a higher or lower rate than the advertised representative APR, depending on your credit rating.6

7. Different Transactions Attract Different Rates

Most creditors don’t charge interest on purchases if you pay the balance off in full within a certain timeframe. After that, you’ll pay the APR on the balance. Companies backdate interest, which means that your spending starts accumulating interest from the date of purchase unless you pay it off quickly.7

You’ll almost always pay a higher rate of interest on cash withdrawals, known as the cash advances rate. Companies apply the interest charges as soon as you make a withdrawal, even if you pay the balance back in the same month. Therefore, using a credit card is an expensive way to access cash.

8. Companies Allocate Payments by Interest Rate

All credit card agreements have an allocation of payments clause in the terms and conditions, also known as an order of payments clause. Companies charge different interest rates for different transactions, so you may have several balances on your account. For example, your balance might be comprised of purchases, cash withdrawals and a balance transfer.

Until 2011, credit card companies could allocate monthly payments however they liked. Therefore, many lenders allocated payments to the cheapest balance first, so the most expensive balances continued to accumulate large amounts of interest. It’s now mandatory for lenders to allocate payments to the most expensive balance first to minimise the interest due.8

9. You Can Use a Credit Card to Reduce the Costs of Existing Borrowing

A zero percent balance transfer credit card can help you reduce the amount of interest you pay on your existing borrowing. These cards offer a zero percent interest rate, or a very low interest rate, for months or even a few years. This allows you to transfer debt from an existing credit card and stop paying interest for a set period.9

This option can be helpful if you’re currently stuck on a high interest rate and want to stop accumulating interest while you pay the balance off. However, you could lose the zero percent rate if you fail to make the monthly payments. Furthermore, interest rates can increase significantly if you don’t pay the card off before the end of the interest-free period.

Some lenders charge a small fee to transfer your balance to the new card. Moreover, you usually need to do this within the first three month to qualify for the zero percent interest rate.

10. Understanding Minimum Payments and Late Fees Is Crucial

Credit card customers must pay a minimum payment on their account balance each month. UK law dictates that the minimum payment must be at least one percent of the outstanding balance, plus interest and any account fees. However, most lenders require minimum payments of between three and five percent of the balance.

You may be charged a late fee if you don’t make the minimum payments on time.10 Late and default fees accumulate interest, so repeatedly missing payments can be expensive.

11. Comparing Cards Can Help You Get the Best Deal

Comparing several credit cards can help you get the best product for your circumstances. Fortunately, there are plenty of free card comparison websites that allow you to compare the APR rates, fees, and benefits of various cards.

Some credit cards, such as the Santander Ultimate Cash Back, come with no annual fees. This means that you won’t be charged simply for using the credit card. Having no annual fees is advantageous, as you’ll still benefit from your card’s benefits or rewards without needing to worry about additional costs.

12. You Can Get Help for Debt Problems

Credit cards can be helpful for making big purchases or reducing the cost of borrowing, but they’re not a solution for chronic and unmanageable debt. Managing your debt problem by borrowing more on a credit card isn’t a good long-term option because it can cause your debts to spiral.

Organisations like StepChange can provide free, impartial advice to reduce your debts and help you access support, such as the government’s Breathing Space scheme.11

Hannah Stephens

Contributor