Avoid pitfalls by understanding how credit cards work.
Getting your first credit card is an exciting moment. Once you have a card, you can enjoy the convenience of charging a purchase fee while building a responsible credit history and towards a higher credit score. However, there are some important steps to take before signing up for your first card. There are many credit cards on the market, so you’ll want to find one that’s right for you. You should also be willing to manage your card responsibly.
Here’s everything you need to know about how to get your first credit card.
How credit cards work
Every fee is a loan.
When you use a credit card, you don’t tap into your own money, like when you use a debit card connected to a checking account. Renee Robinson-Jones, vice president of product management at Georgia’s Own Credit Union, said: “You have to remember that a credit card balance is a loan.
Technically, you can charge up to the amount in the credit line of the card, also known as the credit line, but that does not mean that you should do so; Experts usually recommend using less than 30% of your credit line.
Every month, you will receive a statement listing all your fees and balances in the card. You’ll also see the minimum payment required, which is the lowest amount you can pay that month to keep the account in good shape. That payment is calculated based on your interest and balance or as a fixed amount, if the amount you owe is small.
Interest is added to the revolving balance
If the credit card has a grace period, you can avoid being charged interest as long as you pay the full balance in full before the due date. However, any outstanding balance will be transferred to the next month, accompanied by interest.
Interest rates are expressed as APR, which stands for the annual percentage rate. The interest charges of a month may not be too bad, but for credit cards, the compound interest rate is compounded. That means interest is charged on the amount you charged as well as the interest that was added last month. Paying only the minimum payment can be very expensive and can take years to get out of debt.
For example, let’s say you charge $1,000. Assuming a 25% APR and a minimum payment of 3%, you’ll need 11 years to achieve a zero balance and you’ll have to pay $1,499 in interest. The same $1,000 balance you pay in two months will only cost you a little more than $31 in interest.
“The statement has a partial section that tells you how much interest you’ll have to pay if you only pay the minimum,” Robinson-Jones said. “Pay attention to it. As you will see, the financial cost can be half the minimum payment. ”
Terms and Conditions of Problems
Each credit card has its own terms and conditions that you agree to when opening an account. They are listed in the application and include credit card information such as:
APR. Cards may have different APR for cash purchases and advances (taking money out of the account instead of using the card to make a purchase). If you pay late, you may face a higher APR penalty.
Fees. Typical fees vary by card but may include annual fees, late payment fees, over-limit fees, foreign transaction fees, and cash advances.
Payment policy. This includes details such as how to calculate the payment, as well as the renewal period and due date.
Rewards. If the card allows you to earn rewards when you spend, information about rates, values, and conversions will be listed.
The benefits. Some credit cards come with travel insurance, payment protection plans, and other perks.
You agree to the terms and conditions when receiving the card, so research the cards that interest you to know in advance what they are.
Make sure you’re ready for your first credit card.
In addition to knowing how credit cards work, you need to know if you’re willing to become a responsible credit card owner.
Meet age requirements
You can apply for a credit card in your own name when you turn 18. If you are under the age of 21, you will need to prove that you have an independent source of income. Instead, you’ll need a well-trusted co-signer who meets age requirements.
Create a budget
Budgeting ensures you always spend less than you earn. You can then decide what expenses you want to charge without financial trouble. For example, if your gas cost is $100 a month, you might consider putting that money on your credit card and then paying it out gradually before interest charges start accruing, especially if you get rewards when spending at the pump. Charging for existing expenses like this and then paying off the balance can help you get into the habit of using a responsible credit card, maintaining within your budget each month while building credit.
Drag your credit report
If you have other forms of credit, such as a student loan or auto loan, you already have a credit report. You can get it for free from dailyCreditReport.com to make sure everything is correct. Unfortunately, identity theft can occur, and if someone has opened an account in your name, that account will show up on your credit report. Follow the Federal Trade Commission’s guidance on incorrect credit reporting disputes.
Get used to credit scores
The financial data on your credit report will be counted towards your credit score, the most common of which is the FICO score. Fico scores range from 300 to 850, with a poor credit score of 579 or lower, 580 to 669 is considered good, 670 to 739 is a good score, very good from 740 to 799, and anything 800 or more is an excellent score.
Payment history and credit usage are the most important factors in determining this score, followed by the length of your credit history, the combination of in-use credit and new credit.
Good options for the first credit card
With so many cards on the market, how do you identify the right card for you? The key is to identify one of the possibilities that you will qualify and have the most practical features for your situation.
Student credit cards. “Young people who are in college should definitely look at student cards,” Robinson-Jones said. These cards usually don’t require established credit, and some cards even have rewards programs.” In fact, you can find student cards that offer bonus items for everyday expenses, like gas, dining, or groceries.
Credit cards are secured. These cards require the cardholder to pay a deposit equal to the card’s credit limit. Your cash deposit guarantees a credit line, so the issuer will be less at risk. Matthew Goldman, credit card expert and product manager for card issuance platform Apto Payments, recommends guaranteed cards for those new to credit. “Qualifying is easier than an unsecured credit card,” he said. This is a great way to start.” Many security cards come with rewards programs and are free annually, such as discover it guaranteed credit cards. This card gets a 2% cash refund at gas stations and restaurants on combined purchases of up to $1,000 per quarter, followed by 1% for all other purchases. The publisher will begin reviewing your account after seven months to determine whether to transfer your account to an unsecured card. That means you’ll get your deposit back if you handle the card responsibly.
“Starter” credit card. If your FICO score is between fair and good (580 to 739), you may be eligible for an unsecured card, such as the Capital One QuicksilverOne Cash Rewards Credit Card. It has an annual fee of $39, but it earns an unlimited 1.5% refund for all purchases, so cardholders don’t need to update their reward categories.
Retail cards. Department stores and large boxes sometimes offer retail credit cards, which tend to require higher level requirements. Store cards can be beneficial if you regularly spend money with retailers and can take advantage of card offers and discounts, but be aware:
These cards usually have high APR and low credit lines.
What to do if your credit card application is rejected
Don’t be disappointed if the issuer rejects your application. The issuer will send you a notice of adverse action accompanied by a brief explanation of why you were rejected and the credit reporting agency they used to make their decision. If you want to object to the decision, call the issuer and ask the line to reconsider.
If this happens, you can do a number of things to improve your approval rate in the future:
Add non-credit data to your credit report. Credit reporting agency Experian offers Boost, a free program that allows you to add your mobile phone and electricity and water bills to your report. Paying those accounts on time can increase your score.
Become an authorized user. If someone has good credit that allows you to join their credit card account as an authorized user, that account will show up on your credit report. As long as the bill is paid on time and the balance remains low, that will help your score increase.
Increase your income. The issuer may have rejected your application because your income is too low. You must be able to process at least the minimum account-related payments, so earning more income can help the issuer see you as a stronger applicant.
Pay off your debts. If you’re having balances on different credit products, the issuer may think you can’t afford to take on another debt. Reducing your financial obligations can make you a better candidate for the card you want.
When you’re ready to try again, sign up for each card one by one. Too many applications at once will lower your score, especially if you don’t have a lot of information in your credit report.
Tips for using your first credit card
Make full payments a habit. Keep track of your charges as you continue and stop before the balance becomes tense.
Payment automation. “Sign up to the bill payment system immediately,” Goldman said. You won’t have to worry about your payments on time.” The money will be deducted from your checking account when the bill is due and you can arrange to pay in whole or in part.
If you have to rotate the balance, commit to paying it off as soon as possible. When your card is at zero balance, you can start charging again.
Tips for Parents To Help Your Child Choose a Credit Card
As a parent for teens, Robinson-Jones recommends that parents participate in the process of studying their child’s credit card. Compare the cards that the child qualifies for.
“Guiding them to the card will really help them,” Robinson-Jones said. It should have good mobile tools so that they can track charges and pay with their device. Talk about interest rates and find the card with the lowest APR. They may want to buy something expensive, and that ratio will matter.”
Credit card management is not intuitive, so parents should explain what to know about credit cards, such as how to pay and avoid debt, as well as how rewards work. Review reward programs involving different cards. For example, a fixed-rate refund card may be easier to understand, but your child may go ahead with a rewards program by offering higher rates for certain purchases, such as at restaurants and gas stations.
Don’t delay: Set up credit early
Great credit reputations don’t happen overnight. Goldman says start when you’re young with your first credit card and use it strategically. When you have a year or more of excellent credit card activity listed on your credit report, lenders and businesses will find that you can manage your money and credit consistently.
“Good credit is important for many reasons,” Goldman said, “You’ll pay less for goods and services because you’ll be eligible for loans at better interest rates and you can even pay less for insurance.”
Keep the first card open and active, even after you sign up and start using other credit cards and products. It extends your credit history and demonstrates consistency. That’s important not only for credit institutions, but also for landlords and even for employers. “As soon as you’re ready to have a credit card, sign up,” Robinson-Jones says. “It sets the foundation for financial success.”