Should I get a credit card? Ask these questions first…
Before you apply for a credit card, you need to be able to answer a critical question:
1. Why do I want a credit card?
Being able to answer this is essential because the best financial decisions are the ones you make for your future self. If you can’t clearly explain why getting a credit card will benefit your future self, it might not be the best decision.
For example, getting a credit card to make ends meet might help immediately, but it will make things harder in the long run. If you’re spending more than you can afford to pay back, you’ll build a mountain of debt and struggle with interest payments for years.
In the rest of this blog, we’ll delve into four other questions that will help you make the right decision for your financial circumstances.
2. How will a new credit card impact your credit score?
Credit cards can impact your credit score in numerous ways, both good and bad. It’s vital that you’re able to anticipate how getting a new card will affect your credit score.
How can a new credit card damage your credit score?
All financial products have risk, and some can be a risk even if you don’t end up using them. That’s true for applying for and using a new credit card too. Some of the most common ways a new credit card could damage your credit score are:
- Lowering your credit score due to a hard credit check. This will occur regardless of whether you’re approved.
- Spending more can increase your credit utilisation ratio.
- Missing payments on your credit card (or anywhere else) is a quick way to seriously damage your credit score.
How can a new credit card improve your credit score?
Using a credit card has risks, but if you know how to use your card wisely, you can avoid them with relative ease. Appropriate credit card use can even give your credit score a boost by:
- Making your payments on time and in full.
- Using less than 25% of your available credit.
- Broadening your credit mix.
Understanding these benefits and risks can help you assess if getting a card is right for you. And if it is the right choice, it will help you prepare for the short-term drop in your credit score.
3. Is a different type of credit better for your needs?
Credit cards are an incredibly useful form of credit. But depending on your intended use, a different type of credit may suit your needs better. Credit cards are great for regular purchases like a meal out, transit fares, or subscription fees.
However, it might make more sense to use a personal loan if you’re planning to make a larger purchase. For larger purchases, a personal loan offers several advantages:
- The average credit card’s interest rate is more than twice as high as a personal loan.
- A personal loan may have less impact on your credit utilisation ratio.
- A loan can improve your credit mix if you already have a credit card.
Take the time to compare what a credit card offers to your needs as a borrower. Using a credit card when another credit line better fits your needs could put you deep in debt.
4. Will you be applying for additional credit in the near future?
As we mentioned earlier, credit card companies will run a hard credit check when you apply for a new card. That leaves a negative mark on your credit report for as long as two years. While your credit score will usually recover from that within a year, it could impact your ability to secure a larger line of credit.
5. Is it your first credit card?
Credit cards are one of the most useful tools for building credit. If you’ve just turned 18 or are trying to build your credit score, opening a credit card might be a smart decision. Keep in mind that at this point in your life, credit card companies may hesitate to lend to you. Without a history of repayments, there’s no record of your creditworthiness. That’s the catch-22 of credit. If you don’t have it, you can’t get it. So, how do you get started?
You have a couple of options. If you’ve been banking with a building society previously, speak with them about your options. They may be able to offer you a credit card, having seen how you manage your account with their institution.
You can also turn to a student credit card. This type of card will have a lower credit limit and a higher interest rate, but may be easier to qualify for.
Alternatively, you could turn to a credit builder product, like a credit builder loan or a credit builder card. These products help you build the payment history that you’ll need for credit products with more favourable terms.
Finally, if you’re new to building credit, take the time to understand the terms of using your card. They’ll contain useful information about:
- Billing periods (your payment due dates).
- Your credit limit (remember to use no more than 25% of this).
- How to complain if something goes wrong.
If you already have a credit card and are considering another card, check out our article on how many credit cards you should have.
Build your credit with Pave
If you get a credit card — or any other line of credit for that matter — it’s essential that you make timely payments. Why? Because your payment history is the most influential factor when it comes to your credit score. Timely payments will strengthen your credit score, while late payments will damage it.
Making timely payments isn’t always easy. With a busy life and tight finances, it can be a challenge to keep track of each upcoming bill. Fortunately, that gets a lot easier with the Pave app. Pave will track your bank accounts and your upcoming bills so that you’re never surprised by a bill. And we’ll report your timely payments to credit reference agencies to help boost your score.
To see for yourself why hundreds of thousands of Brits have used Pave to build their credit scores, download the app today!