Getting a new credit card is not something you should rush into, at least not before you’ve done your research and carried out a full credit cards comparison of everything on the market. You should also assess the financial risks involved with owning a credit card – or using any other form of credit, for that matter – before submitting an application.
So, what risks are associated with having a credit card? To find this out, you will need to fully understand how credit cards work. You will also need to read the small print and all of the terms and conditions of a particular credit card before applying. It is very important to find out and think about:
- What fees, charges or penalties you may be charged for using your card. Certain types of transactions incur penalties from some credit card companies, such as using your card abroad or to withdraw money from an ATM.
- What will happen if you pay late, or miss a payment. If you pay your credit card bill late, or miss a payment completely, there will be ramifications. You are likely to be charged a penalty, plus additional interest on your balance. Late or missing payments are also likely to show up on your credit history, which can affect future applications for credit.
- How much extra it would cost to own a credit card if you could only afford the minimum monthly repayments. As much as you may try to clear your balance in full each month, there may be some months when you can only afford the minimum. You need to work out how much this would cost you in interest, which you can find out by looking at the card’s interest rate.
- How much you can afford to borrow on a credit card on your income. Different credit cards come with different credit limits, which is the maximum you can spend on them. You can also request or negotiate your credit limit with the lender in some cases. Before choosing a card with a very high credit limit, take a look at your monthly income to make sure you’d be able to pay that amount off if the impulse to spend takes over.
- How likely you are to end up in debt. If you are a bit of a reckless or impulsive spender anyway, and you actually need to stop spending so much money, a credit card may not be the best idea for you. In fact, credit cards can make reckless spending even easier to do, making it more likely that you’ll land yourself in debt.