Looking for your first credit card?
With advertisements all around you, applying for your first credit card may seem like a simple and attractive thing to do. However, there are a few common traps and pitfalls you should avoid.
Firstly, why get a credit card?
You may not have thought much about your finances yet, so it’s important to take your first steps cautiously. A credit card lets you purchase items and services by drawing on a pre-defined credit limit. Before applying for a card, ensure that you have the knowledge and ability to use one responsibly.
Beware of the ‘free money’ trap!
For tertiary students in Hong Kong, each credit card offers a credit limit of up to HK$10,000. Be sure not to regard this credit limit as ‘free money’, and carefully consider your ability to repay what you spend. Avoid ‘buy now, pain later’!
After a period of time – a ‘grace period’ – you’ll need to start paying interest on your card’s balance. The annual interest rates for credit cards can be as high as 40%. Therefore, ensure you pay off the card’s balance in full every month to avoid interest charges.
Lenders often also charge various annual or monthly fees, which can add to the cost of your card.
Getting something for nothing?
As the saying goes, there’s no such thing as a free lunch – and the same is certainly true for credit card gifts. Many lenders encourage people to apply by offering welcome gifts and spending rewards, such as cash coupons, appliances, and even flight tickets!
While these promotions can be welcome bonuses, they are often more complex than they seem. Many have strict rules, stipulating that you spend a certain amount within a set time period to receive the offer – an expense that will almost certainly be more than the value of the gift itself.
Although these cashback and rewards incentives appear to be welcome bonuses, make sure that you keep a clear head and don’t spend impulsively.
Understand your card
Before committing to a credit card, shop around for the best deal, and make sure you fully understand the terms and conditions – important ones include:
- The length of the grace period
- The interest rate charged on your card’s balance
- Your card’s monthly or annual fees
- Charges incurred by late payments
- The ability to withdraw cash (cash advance)
Unlike a debit card, cash drawn on a credit card is a loan, meaning that it can be subject to quite high interest rates. If your bank offers a low interest rate on withdrawn cash, it may be subject to high fees instead.
Keep track of your statements, just as you would with a regular bank account. If you think you’ll have trouble paying back your balance, don’t repay it using another credit card or loan – instead, ask your bank for a lower credit limit to help you keep track of your spending.