As a first-time credit card seeker, there’s a lot you can do to save your time during the process – like learning some important terms such as credit history, credit score, and the potential consequences.
First things first – a credit card resembles other types of loans, as it lets users buy stuff by using someone else’s money temporarily. You’d repay that loan in monthly installments, which gives users a chance to afford things they couldn’t pay for in one go.
Nowadays, credit cards are used virtually anywhere – from purchasing a coat in Zara and other fast-fashion stores to paying for groceries and funding your passion for online slots at the online casinos approved by Techopedia, it’s easy to whip out your card and solve your money problems. For the time being, at least.
But users, beware – using credit cards can be a double-edged sword precisely because they make it so easy to afford a purchase outside of your price range. Many people will have a credit card limit—which is the money you can spend by using your card—that’s higher than what they currently have in the bank.
Once they max out their credit cards, many find themselves unable to pay the installment in due time. Depending on how late your payment is, you could incur late fees and do some serious damage to your credit score – bringing us to another term that’s important to remember.
A credit score is a three-digit number that’s used to predict how likely you are to pay a loan back on time. It’s based on credit reports which are recorded by Credit Reference Agencies (CRAs). The three main CRAs in the UK are Equifax, Experian, and TransUnion.
All of your credit reports are a part of your credit history, which is built for years and shows how trustworthy a person is in terms of paying back what they owe. When deciding whether to issue a card, credit card companies look at your credit history.
Interestingly, owning a credit card is the most common way to build a credit history, which leaves newcomers in a predicament. If you are applying for your first card, it’s worth checking through a credit bureau to see whether you have already initiated a credit history. This can happen once you borrow money and successfully pay it back – like a student loan.
Currently, £20 billion per year is loaned to 1.5 million students in England, so there’s a good chance an average citizen has something to show for in their credit history.
So how do you build a good credit score that will contribute to your credit history? Start by staying well below your credit limit. The credit utilization ratio—which is the percentage of available credit you use—should be as low as possible. It would be ideal to use less than 30% of your limit, which will help your credit score soar.
Apart from paying your installments on time, you should also pay more than the minimum amount on the credit card statement. The minimum amount won’t cover more than the past month’s interest and fees, so you aren’t making a lot of progress toward paying your debt. Keep piling on charges to your card and the situation can turn very dire, very quickly.
