Applying for a credit card: How to get it right

Welcome to Credit Month on Get Out of Debt! Throughout May I will be posting some handy tips, information and advice about credit cards, applying for them, using them and paying them off!

The first installment of our credit card crackdown will start where it all begins - applying for a credit card. As this blog is all about getting out of debt, we will be assessing whether you truly need a credit card to begin with. If you decide you do, we will also touch on the best ways to apply for a credit card, the different types of credit cards and which is the best fit for your lifestyle.

Do you really need it?

At first glance, credit cards offer convenience, rewards and possibilities. And if you are smart about the way you use your credit card, all these things can be true. However many Australians are using cards out of desperation. They don’t see the urgency in being able to pay them off and end up with thousands of dollars worth of debt they can’t afford to repay.
There are several reasons why you would need a credit card and having worked at a debt management company for 10 years, I have heard all the excuses:

• My parents had one, doesn’t everyone?
• I want to earn the points
• I need it for emergencies
• I need it to pay a bill
• I want to buy a TV on sale, but I don’t have the cash for it

No matter your reason behind wanting a credit card – you need to be aware of the responsibilities which come hand in hand with your new line of credit.

How Does a Credit Card Work

When you apply for a credit card you are essentially borrowing money from the bank. Some cards will have a limit of$2000, others a limit of $10,000. That money sits on your card until you spend it. The bank will then charge you at a rate of interest until you have repaid the money you spent.

Some credit cards will have an interest free period between billing cycles which will allow you to repay the money before any interest is accumulated. To own a credit card successfully, you should repay your credit card before the interest free period expires each and every month.

Which Card to apply for?

There are literally thousands of credit card products on the market at the moment. Not only that, we are bombarded with terms like low interest, no interest, 0% balance transfers, premium, platinum, Visa, MasterCard, interest, annual fees – so which one do you apply for? Well it all comes down to why you need a credit card and how you plan on using one. First, let’s take a look at some of the more common features of credit cards:

Low interest cards with higher annual fees - These cards usually offer a good interest rate but will always have annual fees.

Higher interest rates with no annual fees – These cards tend to have a slightly higher interest rate but forgo the annual fee.

Interest Free period – most credit cards these days will have an interest free period, like the billing cycle. This means if you use your card just after you received your bill, you will have until the next bill to repay what you spent without accruing any interest. But if you use your card 3 days before your next bill you will only have 3 days to repay it.

Balance transfer – Some cards offer a 0% interest period on balance transfers. This means you can transfer the money owing on existing cards to this card and pay no interest for a certain amount of time – this could be from 3 to 18 months. There are often limits on the amount you can transfer, for example – only 80% of the credit limit.

So now we know some of the common qualities of cards, we need to apply them to your situation to see which is the best card for you to apply for.

You only want a credit card for emergencies or unexpected large purchases

I am one of these people. I have a credit card, but I don’t often use it and when I do I can pay it off within the interest free period. In cases like this, it is better to go for a card with no annual fees. Yes the interest rate is generally higher for these cards, but if you can pay it off before the interest free period is over it won’t even come into play. You might even go for 12 months without having to use your credit card, in which case you don’t want to pay $100 in fees for a card you don’t use.

You need it to cover most bills but will be able to make regular repayments to keep it in check

If you are going to be using your credit card quite regularly and know you will drag the repayments outside the interest free period it’s better to opt for the lower interest card with annual fees. This will save you on the interest repayments while you are paying off your card. A small annual fee is usually applied to cards with a lower interest rate.

You already have a credit card at its limit and you need another one to cover your repayments

If this sounds like you, then you are in the red zone. If you are struggling to pay your regular expenses without a credit card then you are in debt and headed towards insolvency. I don’t mean to alarm you, but many people don’t realise they are struggling with their debts until it is too late. Luckily for you, there are things you can do to get out of this mess. My first piece of advice would be to call a financial counsellor to discuss your situation. There is an Australia-wide free call number which will put you in touch with a free financial counsellor in your area. That number is 1800 007 007.

I would also suggest you try to come up with a budget to see how much money you have left over at the end of each month. If you have surplus money, you can apply for a credit card with a 0% balance transfer and try to transfer the majority or all of your existing debt onto a card with 0% interest on that balance. By consolidating your debt, you might be able to get a few months grace from interest while you pay down your debt.

Now you know which Card – How do you apply?

Easy… or is it? Now you know which kind of card you are after, you need to find the right product for you. Applying for a number of different cards all at once can have a negative impact on your credit file. It can even lead to rejection of your credit cards or loans. You should do your research before you apply for your card to find the best product. You can use a comparison site, like Rate City to see all the cards laid out in one place. You can even use the search function to find a card with 0% balance transfers, low annual fees or any other criteria.

Once you find the card you want the application process is usually as easy as filing in a few personal details. Some banks will let you know the outcome straight away, while others may take up to 5 business days to run credit checks and alert you of your approval.
While you are waiting for your card to arrive… I will put together the next installment of my Credit Month blog posts for the Get out of Debt Blog. Next week I will be talking about the Best practices for using your card. I have already touched on some tips in this post, but next week I will elaborate on how you should use your card to avoid falling into debt.

Until then, if you are struggling with debts and want to speak to someone you can call me at Debt Rescue on 1800 00 3328. Signing off! Sophie Bright.