How to choose your first credit card

Like getting behind the wheel of your first car, choosing your first credit card is one of those "grown-up moments" – equal parts daunting and exciting.

Millennials are less likely to have a credit card than other generations. Survey results from Finder.com.au suggest 45 per cent of Millennials (aged 18-35) don't have a credit card, compared with 24 per cent of Generation X (35-54) and 20 per cent of Baby Boomers (55+).

The low take-up of credit cards for younger Australians is attributed to fear of debt – the average Australian has $3192 owing on a credit card – and a lack of awareness about how credit cards work. It may also reflect the fact that debit cards are widely accepted.

Yet credit cards have many benefits, including consumer protection from fraud and disputes with merchants, access to emergency funds, and the ability to earn rewards points.

Used properly, they can help you cultivate a good credit rating that will help down the track when applying for a mortgage or personal loan.

In case of emergencies

For marketing coordinator Tess Maisey, 25, the motivation to get her first card was to have a fallback source of funds, particularly while travelling.

Tess applied for a card before taking a big trip to Europe because she was determined not to borrow from her parents for the two months she was holidaying.

"I looked around and found that my existing bank had a card that offered free travel insurance and all would be controlled through the same online banking account," Tess says.

"It would be easy to pay off the card with my savings, just a quick transfer, and I would be able to monitor it easily so I didn't get into debt."

Tess also found her credit card handy after her overseas trip when she lost her debit card and again when she was between jobs.

"It was going to be a week until I had a new bank card, but luckily there was no stress about money as I could just use my credit card," she says.

"It was also super handy when I was looking for a job a while back. It was post-Europe so I was already low on cash and what I was earning at a casual job was only enough to cover rent, but I never stressed because I knew I could still eat as I had money there if need be."

How to choose your first card

With the right research, it's easy to find a credit card that suits your lifestyle.

Consider how you plan to use the card and repay the debt.  A no-frills card usually has a zero annual fee and low annual rates, making it an obvious choice for those who rarely use their card.

Comparison website Canstar's credit card star ratings (PDF) ranks 15 "outstanding" low cost cards with interest rates as low as 9.99 per cent, many of them from smaller banks and credit unions such as Teachers Mutual Bank or Community First Credit Union.

On the other hand, if you plan to put a lot of expenses on credit, then it may be worthwhile enrolling in a rewards scheme.

If you know you won't be paying in full each month, ASIC's MoneySmart website suggests looking at a card with no interest-free days. You'll usually pay lower annual fees and less interest, either from the day of purchase or the day your monthly statement is issued.

However, if you always pay off your credit card in full each month, then look for one that offers interest-free days. The higher interest rates and annual fees may be worth it because if you pay it off in full before the due date you'll avoid paying interest altogether.

If you want the imposed discipline of a card that forces you to pay off the balance in full every month, you could consider a charge card. Charge cards are relatively unusual in Australia but American Express has some in its range.

Before deciding on a card, check out fees for annual account keeping, reward programs, late payments and exceeding your credit limit.

Some credit card companies offer introductory low rates for a short period with higher rates kicking in afterwards. Others offer cash-back deals, but these also usually come with higher than average rates.

Be wary of hidden fees and the surcharges that some merchants apply to credit card payments.

Rewards points

For many people, one of the greatest benefits of a credit card is the rewards points. They can be a great way to rack up everything from frequent flyer points to department store credit. The more you spend, the more points you accrue.

Rewards schemes can easily be compared at comparison sites such as Infochoice and Canstar. Don't forget to take note of any annual fee.

The following cards have rewards schemes and no annual fee and performed well in Canstar's credit card star ratings: the Coles No Annual Fee Mastercard, the American Express Essential Card, the American Express Qantas Discovery or Velocity Escape cards. Of the four, the Essentials Card had the lowest interest rate at 14.99 per cent.

When comparing rewards points, it's important to balance the "earn rate" with the "burn rate". Some rewards schemes make it easy to rack up points, but you need a lot of points to actually redeem anything.

For example, the minimum spend required to earn a $100 reward could be $15,000 while a return flight from Sydney to Melbourne may cost $20,000 in expenditure. 

Don't get so excited by rewards points that you spend more than you otherwise would.

Avoiding trouble

The best way to avoid credit card debt is by always paying the full amount on time to avoid extra interest or late payment fees. Fall behind on your payments and you can find yourself with a mounting debt.

If you can't pay in full, then at least make sure you pay more than the minimum, and devise a plan for how to pay off the debt so it doesn't grow.

Keep a close eye on your spending and avoid the temptation to use credit card advances, as they usually attract high interest.

Credit ratings inform lenders about your history with paying off debt. This includes credit card payments, personal loans and even bill payments. It's important to have a good credit rating when you need to apply for a home, car or personal loan.

Credit cards can help you build a healthy credit history for future loan applications, while also teaching valuable lessons on budgeting and independence.

This article was produced in commercial partnership with Amex. The advice and reviews are independent.