12 Your first credit card
When you reach 18 you should aim to get a credit card. After a bank account and a savings account, a credit card is the third cornerstone to personal financial management.
Until you reach the age of 18 no provider will give you a credit card – in the same way that bank overdraft facilities are not available to those under 18. This is because until you are 18 you are not normally legally responsible for your debts.
It may make sense to apply for a credit card from the existing supplier of your bank account, because they will have evidence (hopefully!) of your experience in managing your bank account properly. This will help in their assessment of whether or not you should now be given a credit card.
A credit card allows you to pay for goods and services over a period of time. Instead of the cost of items being taken directly from your bank account, you receive a monthly bill – typically online – telling you the outstanding balance on the account and the minimum amount that you need to pay off this month (for example the greater of 1% of the balance or £25). It makes good financial sense, though, to pay off each monthly bill in full to avoid paying the high rates of interest that you would otherwise be charged.
So a credit card enables you to buy goods that you might not be able to afford in total over the period of a single month but that you can afford if the sum can be spread over a number of months.
All cards have a maximum balance limit that you cannot exceed. This limit will be communicated to you, and at the age of 18 you can expect the limit to be small – maybe just a few hundred pounds.
One reason for using a credit card is that it can help to build up a positive record of how you manage your money. If you use the card sensibly this positive record will help with your credit rating – a subject you’ll explore later in this course. Mismanaging your credit card account – for example by missing monthly repayments or even just being late with them – can damage your credit rating, as well as racking up interest charges and penalty fees.
So take great care in managing your credit card account.The UK credit rating agencies will be watching you.
Now watch this video where moneysaving expert Martin Lewis talks to students at Denbigh School in Milton Keynes about the pros and cons of credit cards.
Activity 3 Good and bad uses of credit cards
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