Ready for your first credit card? Here’s what you need to know
Credit cards can give you greater buying flexibility, as well as help establish and build your credit. However, it’s important to understand how credit cards work before signing up for one. Are you or someone you know considering getting their first credit card? We’ve put together a checklist for what you need to know before applying for your first credit card.
Compare your credit card options to find the one that’s right for your financial situation
A financial institution or credit card company will offer you either a secured or unsecured credit card. Secured credit cards are backed by a deposit, usually equal to the limit of the card. Since this eliminates any risk that the credit card company won’t be paid, this option is typically used for “starter credit cards.” As you make regular, on-time payments, you’ll eventually earn your deposit back and transition to an unsecured card.
Have the option of choosing an unsecured card instead? Take it – avoid a deposit and keep your cash in your pocket.
Take advantage of student credit card offers if you’re in school
Many people apply for their first credit card as a student, which is a great opportunity to start establishing a credit history. The benefit of student credit cards? You likely don’t have to prove your income level or have an established credit history to qualify for one. Student credit cards generally have a lower credit limit, which can also be beneficial as it prevents you from carrying an unmanageable balance on your card.
Understand how a credit card will affect your credit score
There are a few ways credit card usage will affect your credit score:
- Payment history: Any late or missed payments will be reported to the credit bureau. One or two late or missed payments will not ruin your credit score, but it’s best to pay your balance on time every month to maintain a good credit score, and even improve it over time.
- Credit utilization: It’s best to use less than 25% of your credit card limit in order to maintain the best credit score possible. For example, only carry a balance of $250 or less if you have a $1,000 credit limit.
- Length of credit history: The longer you have your credit card, the more established your borrowing history will be – this can reflect positively on your credit score. Consider applying for a card as soon as you turn 18, so you can establish your credit as soon as possible.
- Credit inquiries: Every time you apply for a credit card, there’ll be an inquiry on your account. If you’re a student, be cautious about booths setup on campus – many will try to get you to apply for a student credit card. If you end up not wanting the card, the application will still appear on your credit report.
Establish responsible credit card habits right away – pay your balance in full every month
Your credit card statement will indicate a minimum payment – this is the amount you have to pay to maintain a positive payment history. While your credit score may not be affected, you’ll incur interest charges by failing to pay your entire balance before the end of the grace period.
Watch out for hidden fees
Before agreeing to a credit card, make sure you understand all the terms and conditions. While many starter credit cards are free, the majority of credit cards (especially rewards credit cards) charge an annual fee. If you happen to sign up for a rewards card, make sure the rewards you earn will be equal to or more than your annual fee. Other fees and conditions to lookout for include: late fees, foreign transaction fees, insurance/payment protection fees and interest rate increases.
Keep your credit card information secure
Credit cards can put you at risk for financial fraud. It’s important to keep your credit card number and PIN secure – beware of email and phone scams that may ask for this information. You should also take extra caution when making purchases online as this information can be compromised. Check out this article for more information about protecting yourself from financial fraud.
Now that you’ve familiarized yourself with credit cards, here are some tips on how to use your credit card responsibly:
- Are you a student? Pay for larger, planned expenses like textbooks or other school supplies on your credit card, and use your school savings to pay off the balance.
- Unlike debit cards, most credit cards don’t charge transaction fees. Save money by making everyday purchases on your credit card, but pay off the balance each time you get paid.
- Avoid cash advances – credit cards generally charge a fee for these and the interest rate is higher. If cash is required, it’s better to withdraw from your bank account instead.
If you use your credit card responsibly, it’s an easy first step to establishing a good credit score. But if you’re consistently carrying a balance and can’t pay it off, it’s better to be proactive. We recommend you try to find a solution to tackle your debt before it becomes too unmanageable. Learn more about consolidating credit card debt, and getting your finances back on track.