What to consider when applying for credit cards

Credit cards can be a practical and convenient way of making purchases, giving you access to credit on a flexible on-going basis. They offer security in the form of The Consumer Credit Act and can also offer perks like air miles and discounts.

However, it is important to remember that credit cards are like any other type of loan – they are a commitment between borrower and lender with terms and conditions that need to be met. Becoming over-reliant on credit cards or not planning for repayments can have a significant effect on your credit history and potentially your financial security.

We look at some of the things to consider before applying for a credit card, including eligibility, repayments and the different choices available.

How good is your credit history?

Your credit history can determine the types of credit card you will be able to get, as well as the terms you will be offered. Being rejected for a credit card will be recorded in your credit report, so even the process of applying is something for which you should research and prepare.

If you haven’t already, you can check your credit report and credit score to see how lenders may judge your creditworthiness. Your credit score will give you an indication of how lenders may view your credit card application and your credit report will let you see any specific issues such as missed payments. Lenders use their own scoring mechanism to evaluate your creditworthiness, so the final decision will depend on their interpretation.

When you apply for credit a lender may choose to check your credit report, this check is known as a ‘credit search’. They are recorded on your credit report to show how often you apply for credit and to show that someone has viewed your data. If you have a large number of applications, especially in a short period of time, this may indicate over-reliance on credit or financial difficulty and is therefore useful information for lenders. If you are worried about a credit search impacting your credit history there are eligibility tools you can use that give you an indication of how likely you are to get the card. These checks are recorded in your credit history, but cannot be seen by other lenders and as such will not affect your creditworthiness.

There are various organisations that offer these ‘soft searches’, including Money Saving Expert which has tools for loans and credit cards. Most high street banks also have their own eligibility checkers, as well as many financial product comparison sites.

What will you use a credit card for and how will you repay?

In terms of financial planning it’s important to think about why you need or want to get a credit card in the first place. If you’re struggling to cover your outgoings and need a credit card to cover everyday expenses, this may suggest trouble with overspending or with your ability to budget. Credit cards can be useful if you have an unpredictable income or at certain times of year when you need a little extra, but credit should not be used to regularly supplement income.

Paying off your credit card debt is something you should plan into your budget before you begin spending. Missed payments can impact your ability to get credit in the future and if you are not making regular payments the level of debt can grow quite rapidly. It would be wise to estimate the size of your monthly repayments and then use a budgeting tool to calculate how affordable those payments will be.

What type of credit card should you get?

The key things to consider when choosing a card are the interest rate, credit limit, any fees or charges and bonus schemes.

If you are likely to use your card quite regularly and perhaps only make the minimum payment each month, then you will need to find a card with a lower interest rate as possible. How low you can go will depend on your credit history, as lenders will offer preferential rates to those who have demonstrated they are responsible borrowers.

If you plan to use the card for most of your purchases and pay the full balance each month, then a card with a higher spending limit and low annual fees might be more suitable. If a card offers attractive bonuses or rewards for spending, it may also be worth considering, though you should look out for fees or limitations on using the rewards.

Quite a few cards come with introductory offers like a free balance transfer, interest free purchases for a fixed period of time or a lower initial interest rate. These offers can be advantageous, but it’s important to read the small print and be aware of any stipulations that kick in later in the agreement.

If you are interested in checking details of your credit history, you can get online access to your credit report with your Equifax Credit Report & Score, which is free for 30 days and £14.95 a month thereafter.