A credit card can be a useful thing to have. It can help you out in an emergency and offer perks like insurance and rewards points. But it’s important to use it responsibly and avoid overspending.
If you’ve decided to take out your first credit card, it’s important that you understand the basics first. This could help you make the most of your credit card and avoid racking up debt.
Here’s a rundown on how credit cards work, the application process and tips for choosing your first credit card.
How does a credit card work?
A credit card allows you to make payments in shops or online using money you are borrowing from the card provider. You are given access to a ‘line of credit’ and can access money up to your ‘credit limit’.
Credit limit
When you take out a credit card, your provider will tell you what credit limit you are eligible for. Your credit limit is the maximum amount of money you can borrow and it is based on the information you provide in your credit card application. Providers will usually look at things like your employment, income, assets, debts and expenses to make sure the credit limit is affordable and suits your circumstances.
You don’t have to accept the full amount offered and you can ask for a lower credit limit. A high credit limit can impact your borrowing power in the future. As a general rule, the higher your credit limit is, the lower the amount you can be lent.
If you go over your credit limit, you may not be allowed to continue using your credit card until you pay off your balance so it is under the limit. Some providers also charge a fee or extra interest.