Having a credit card opens the doors to many other financial steps. It’s practically essential to have a credit card in today’s consumer world.
Credit cards can provide tremendous convenience. They are often a crucial starting point for building a healthy credit history.
With a good credit foundation, you can reach significant financial milestones like buying a car or a house. You can also get the best rates on loans and other financial products, which will save you money.
Knowing the credit card basics can help keep you out of financial trouble and help you use a credit card so that it benefits you and your long-term finances. If you are in the market for your very first credit card, here are a few tips to know first:
1. Look at Your Unique Financial Situation
Before you get a credit card, take a good hard look at your own financial situation. Review your spending habits. Be honest with yourself about how well you manage debt.
Knowing your financial habits will be key to getting the best credit card to benefit you and avoiding credit cards that work against you.
Scrutinize how you spend money. Take note, for example, of whether you tend to buy fugally on groceries, or spend loosely on travel expenses. This will point you toward the right credit card for you – whether it’s a travel rewards card, balance transfer credit card or a general rewards card, to name a few options.
Understanding your debt situation is also keep to getting a grasp of your financial situation. Credit cards are notorious for creating unhealthy debt if you don’t use them correctly. If you’re already in debt, and your debt is growing, getting your first credit card may not be a wise decision at the moment.
People who have riskier debt situations but still want to get their first credit card may want to consider credit cards designed for people with poor credit, such as a secured credit card or a credit card with a low interest rate.
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2. Know Your Credit Score
Your credit score plays a key role in what kind of credit card you can get. It’s best to know what your score is as you look for the best credit card for you.
To learn more about the details behind your credit score, you can get a free annual credit report at the top credit rating bureaus – TransUnion, Equifax, and Experian.
Your credit score, a three-digit number, indicates your credit worthiness to lenders. Banks, credit unions and credit card companies often rely on this score to tell them whether you’re a good borrower. The lower your score, the riskier you are viewed as a borrower.
Most lenders turn to your FICO Score to determine whether or not to approve you for a loan or line of credit. Others use your VantageScore.
If your score is lower, you may not qualify for a credit card. Or, you may only qualify for credit cards with higher rates. If your score is higher, you can probably qualify for credit cards with lower interest rates, which can save you money on interest payments.
Fortunately, there are several ways you can improve your credit score to help you qualify for the best low interest rate credit cards. Among them: get a secured credit card that requires a deposit. Your payments to a secure credit card will be reported to the credit bureaus, which can help boost your credit score.
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3. Understand the Impact of Credit Card Debt
Credit cards can be excellent tools. However, they do have downsides to consider.
Credit card debt is considered one of the most harmful kinds of debt to have. That’s because it can snowball rapidly and push you further in debt. It can create a cycle of debt that is very hard to escape.
If your credit card debt becomes unmanageable, it can have negative consequences in other parts of your financial life.
For example, if you must make higher monthly credit card payments, you may not be able to afford the things you really want to buy. You might have to delay major plans like buying a new car or new home until your credit card debt is under control.
A high amount of debt on your credit cards will likely have a negative impact on your credit score. Your credit score, after all, factors in the ration of the debt you are using compared to the amount of credit that’s available to you.
High credit card debt can even affect your job prospects because some employers do check on your credit score during the hiring process.
You can avoid the pitfalls of credit cards by planning to pay down any credit card balance quickly. With clean credit cards, or cards that have no balance, you can stay on track with your finances.
4. Compare Perks for the Best Rewards
One of the best features about credit cards is their ability to return money to the cardholder. Not all cards issue returns, but many do.
Some credit cards’ rewards are competitive, and others are not. Knowing your spending habits plays a key role in helping you find the best rewards card for you.
If you spend a lot on traveling, you may find a competitive rewards credit card will offer substantial kickbacks. Many travel rewards cards give you points as you make purchases, and then you can use those points to get discounts for travel-related expenses like hotels, airline tickets or rental cards.
If your spending is mainly on daily necessities, a general rewards credit card might be ideal for you. You can find general cash back credit cards with varying terms, from 1% cash back to 5% cash back.
Each credit card offers different perks, whether its rewards points or cash back, so it pays to shop around a bit.
5. Take a Moment to Compare Interest Rates
Interest rates are one of the most fundamental features about credit cards.
The interest rate on your credit card determines how much you will pay if you carry a balance. Interest rates on credit cards vary widely – typically from the low teens to the low 20s.
It is critical to understand how interest rates work before you get a credit card.
Essentially, whatever balance you have on your credit card at the end of the monthly cycle will be charged the APR. That interest is then added to your balance as additional debt you owe.
The difference between what you can save with a credit card with a low interest rate compared to a credit card with a high interest rate can be significant.
Take an example of the difference between a credit card with a 15% interest rate and one with a 22% interest rate. If you carried a credit card balance of $5,000 and made monthly payments of $100, here is the difference in your ultimate payment:
- 15% APR Credit Card: $2,895 in Total Interest, 6.6 Years to Pay Off
- 22% APR Credit Card: $8,678 in Total Interest, 11.4 Years to Pay Off
Notice in the above two examples, that with the higher interest credit card in this case you actually end up paying more in interest than you made in original purchases! You spent $5,000, but ended up paying back more than twice that.
This shows how credit cards can be very dangerous to your finances.
Of course, to avoid interest payments, you could plan to pay your credit card balance in full each month.
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6. Be Familiar with Introductory Offers
Credit card companies are vying for your business – and that’s wonderful news for you.
One way that credit card companies are trying to attract more cardholders is by offering better introductory rewards. Sometimes, credit cards can provide an excellent little windfall of cash or benefits when you first open an account.
Many credit cards offer a significant bonus, sometimes valued up to hundreds of dollars, when you open an account and spend a particular amount.
For example, if you spend $4,000 on the Chase Sapphire Preferred Credit Card within the first three months that you have the card, you get a bonus of 60,000. You can redeem those points for:
- $750 in travel credit
- $600 in cash
That’s a significant reward for simply opening an account.
Other credit cards offer 0% introductory period, some as much as for two years, In which you don’t pay any interest on your balance. As we reviewed above, interest charges can really add up and damage your account.
Having a 0% APR is essentially like having a short-term free loan, which can help with paying off large purchases. It can also help with paying down other credit card debt with higher interest if you transfer that debt to your 0% APR credit card.
Only, be aware that you must plan to repay the balance in full before the introductory period ends or you will start accruing interest charges.
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- Best Credit Cards for Bad Credit
- Best Credit Cards for Students
- Best Airline Rewards Credit Cards
- Best Credit Cards for International Students
7. ALWAYS Make at Least the Minimum Payment
It should be called the golden rule of having a credit card: “Make the Minimum Payment No Matter What.”
Ideally, you will pay off your balance in full every month to avoid interest rate charges. However, you may not be in a position to make the full payment. In that case, you should try to pay as much as you can so you keep your credit card balance low and stop interest rates from rising.
If your budget is tight, and it is difficult to make a larger payment, it is absolutely essential that you at least make the minimum required monthly payment.
Here’s what can happen if you don’t:
- Your credit score will likely drop. Your credit score is based in part on your history of making timely payments. If you pay your bills on time, lenders see you as a lower risk. If not, you are seen as higher risk and may not qualify for loans, mortgages or credit cards, among other consequences.
- You could face a penalty. Most credit card companies charge a fee for late payments. If you continue to fail to pay the minimum payment, your fees will add up. If they add up to more than the credit line that you have, you may incur additional fees.
8. Know What Fees You Might Be Charged
Credit card fees come in many forms. When you get your first credit card, take time to read over the fine print related to fees so you know what to expect as you use your credit card.
A late-payment penalty is one of the more common fees. Credit card companies can also charge an over-the-limit fee for when you make purchase that cost more than you have for your credit line.
Your credit card may charge you for making a balance transfer from one credit card to another. Or you could face a fee for withdrawing cash from your credit line instead of making a purchase. Many of the best rewards cards do charge an annual fee for general service to the account, however cardholders often find that the rewards they earn offset those annual fees.
Some cards also charge foreign transaction fees. That’s when you make a purchase in another country. Typically, travel cards do not charge foreign transaction fees, but, again, read the terms of your first credit card carefully.
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9. Protect Your Credit Card Information
Keeping your first credit card safe from fraud and theft is important for a number of reasons.
First, credit card thieves can make purchases that you might be responsible for paying. Although, many credit card companies are willing to work with you to reimburse for purchases made after credit card theft.
Second, if a criminal steals your credit card information, they may use it to help steal your identity. That can wreak havoc on your financial health.
With your identity, thieves can take out other loans under your name, among other activities that can have long-term impact on your financial health.
Many credit cards now come with security chips that provide an extra layer of protection against theft.
To help further stop credit card theft, you can:
- Use secure passwords for your account.
- Report a stolen credit card immediately.
- Monitor your credit card statements for unusual activity.
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10. How to Apply for Your First Credit Card
Finally, once you’ve gotten a sense of the key features of a credit card – both the good sides and the bad – then you can choose the best credit card for you.
Fortunately, applying for your first credit card is easy. You typically fill out an online application with key personal information like your name, address and Social Security Number.
You usually learn in a matter of minutes whether you are approved or denied for your credit card. If the card you’re eyeing has an option for pre-qualification, you might want to choose that option if you aren’t sure whether you would qualify.
The benefits of getting prequalified are mainly that this process does a “soft pull” on your credit history. Soft pulls do not impact your credit score the same way a hard pull can.
When you officially apply for a credit card, the credit card company will conduct a hard pull on your credit. They will report your application to the credit bureaus. The reason is that because if someone is applying for many cards, they could be a riskier borrower because they may be desperate for credit.
Hard pulls on your credit can lower your credit score by 5 to 10 points, although this drop is usually temporary.
So, that’s why it’s better to find the best card for you in advance, instead of applying for several cards at once. And that’s also why it’s a good idea to get pre-approval first.
Your First Credit Card: The Bottom Line
Getting your first credit card marks a major milestone on your financial path. It can open the gateway to many other opportunities by helping you build credit.
Your first credit card can also provide rewards on your purchases, earning you money.
Of course, especially for first-time cardholders, it’s crucial to be aware of how misusing a credit card can actually cause potential harm to your finances.
If you don’t use it correctly, you could easily see your debt mount and your credit score plunge.
When you find the best first credit card for you, make sure you know the basics about how interest rates work, how your debt can be affected and what fees you might face, among the other tips we named above.
The key to getting the most out of your first credit card is to use it responsibly.
