Obtaining your first credit card is an exciting moment. Once you have the card, you can enjoy the convenience of charging purchases while building a responsible credit history and working toward a higher credit score. However, there are a number of important steps to take before applying for your first card. Lots of credit cards are on the market, so you’ll want to find the right one for you. You should also be ready to manage your card responsibly.
Here’s everything you need to know about how to get your first credit card.
[Read: Best Starter Credit Cards.]
How Credit Cards Work
Every Charge Is a Loan
When you use a credit card, you’re not tapping into your own funds, as you would with a debit card that’s connected to a checking account. “You have to remember that a credit card balance is a loan,” says Renee Robinson-Jones, vice president of product management for Georgia’s Own Credit Union.
Technically, you can charge up to the amount of your card’s credit line, also called credit limit, but that doesn’t mean you should; experts generally recommend using less than 30% of your credit limit.
Every month, you will receive a statement that lists all of your charges and the card’s balance. You will also see the minimum requested payment, which is the lowest amount you can pay that month to keep the account in good standing. That payment is calculated either based on your interest rate and balance or as a fixed amount, if the amount you owe is small.
Interest Is Added to Revolving Balances
If the credit card has a grace period, you can avoid interest charges as long as you pay the entire balance in full by the due date. However, any unpaid balance carries over to the next month, with interest.
Interest is expressed as an APR, which stands for annual percentage rate. A month’s worth of interest charges may not be so bad, but for credit cards, interest compounds. That means interest is calculated on the amount you charged as well as the interest that’s been added the previous month. Paying only the minimum payment can get expensive, and it can take years to get out of debt.
For example, let’s say you charge $1,000. Assuming a 25% APR and 3% minimum payment, you would need 11 years to reach a zero balance, and you’d pay $1,499 in interest. That same $1,000 balance that you pay over two months will only cost you a little over $31 in interest.
“The statement has a section that tells you how much interest will cost you if you only paid the minimum,” Robinson-Jones says. “Pay attention to it. As you’ll see, finance charges can be half of the minimum payment.”
Terms and Conditions Matter
Every credit card has its own terms and conditions that you agree to when you open the account. They are listed on the application form and include credit card information such as:
— APR. A card may have different APRs for purchases and for cash advances (taking money out of the account instead of using it for purchases). If you pay late, you might face a higher penalty APR.
— Fees. Typical fees vary by card but can include an annual fee, late fee, over-limit fee, foreign transaction fee and cash advance fee.
— Payment policies. This covers details such as how the payment is calculated, as well as grace periods and due dates.
— Rewards. If the card allows you to earn rewards as you spend, the rate, value and redemption information will be listed.
— Benefits. Some credit cards come with travel insurance, payment protection plans and other perks.
You consent to the terms and conditions when you get the card, so research the card you’re interested in to know what they are in advance.
Make Sure You Are Ready for Your First Credit Card
Aside from knowing how a credit card works, you need to know whether you are prepared to be a responsible credit card owner.
Meet the Age Requirement
You can apply for a credit card in your own name when you are 18 years old. If you’re younger than 21, you’ll need to prove that you have an independent income source. In lieu of that, you’ll need a co-signer with good credit who meets the age requirement.
Create a Budget
Develop a budget that ensures you always spend less than you earn. After that, you can decide on the expenses you want to charge without getting into financial trouble. For example, if gas costs you $100 a month, you may consider putting that on your credit card and then paying it off before interest charges start to accrue, especially if you get rewards for spending at the pump. Charging existing expenses like this and then paying off the balance can help you get in the habit of responsible credit card use, staying within your budget each month while you build credit.
Pull Your Credit Report
If you have other forms of credit, such as a student loan or a car loan, you already have a credit report. You can pull it for free from AnnualCreditReport.com to make sure everything is correct. Unfortunately, identity theft can happen, and if somebody opened an account in your name, it will show up on your credit report. Follow the Federal Trade Commission‘s instructions for disputing credit report inaccuracies.
Become Familiar With Credit Scores
The financial data on your credit report will be factored into your credit scores, of which the most ubiquitous is the FICO score. FICO scores range from 300 to 850, with a poor credit score being 579 or lower, 580 to 669 considered fair, 670 to 739 being a good score, very good ranging from 740 to 799, and anything 800 or higher being an excellent score.
Payment history and credit utilization are the weightiest factors in determining this score, followed by the length of your credit history, the mix of credit in use and new credit.
[Read: Best Secured Credit Cards.]
Good Options for a First Credit Card
With so many cards on the market, how do you determine the right one for you? The key is to identify the one you most likely will qualify for and that has the most practical features for your situation.
— Student credit cards. “Young adults in college should definitely look at student cards,” Robinson-Jones says. “These cards don’t usually demand established credit, and some even have rewards programs.” In fact, you may be able find student cards that offer bonus categories for everyday expenses, like gas, dining or groceries.
— Secured credit cards. These cards require the cardholder to pay a deposit equal to the card’s credit line. Your cash deposit guarantees the credit line, so the issuer takes on less risk. Matthew Goldman, credit card expert and chief product officer for the card issuance platform Apto Payments, suggests secured cards for credit novices. “Eligibility is easier than it is for unsecured credit cards,” he says. “They’re a great way to start.” Many secured cards come with rewards programs and no annual fee, such as the Discover it Secured Credit Card. This card earns 2% cash back at gas stations and restaurants on up to $1,000 in combined purchases each quarter, then 1% on all other purchases. The issuer will start 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 treat the card responsibly.
— “Starter” credit cards. If your FICO score is in the fair to good range (580 to 739), you may qualify for an unsecured card such as the Capital One QuicksilverOne Cash Rewards Credit Card. It has a $39 annual fee, but it earns an unlimited 1.5% cash back on all purchases, so cardholders don’t have to keep up with rewards categories.
— Retail card. Big box and department stores sometimes offer retail credit cards, which tend to have forgiving qualification requirements. A store card might be beneficial if you regularly spend money with a retailer and can take advantage of card discounts and perks, but beware: These types of cards often have high APRs and low credit limits.
What to Do if Your Credit Card Application Is Rejected
Don’t despair if an issuer rejects your application. The issuer will send you an adverse action notice with a brief explanation about why you were denied and the credit reporting agency it used to make its decision. If you want to contest the decision, call the issuer and ask for the reconsideration line.
If this happens, you can do a few things to improve your odds of approval in the future:
— Add noncredit data to your credit reports. The credit reporting agency Experian offers Boost, a free program that allows you to add cellphone and utility bills to your report. Paying those accounts on time can increase your score.
— Become an authorized user. If someone with good credit lets you 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, it will give your scores a lift.
— Increase your income. The issuer may have rejected your application because your income is too low. You have to be able to handle at least the minimum payments associated with the account, so earning more income can help issuers see you as a stronger applicant.
— Pay off your debt. If you are already carrying a balance on different credit products, issuers may think you can’t afford to take on another debt. Reducing your financial obligations could make you a better candidate for the card you want.
When you’re ready to try again, apply for one card at a time. An overabundance of applications all at once will lower your scores, especially if you don’t have much on your credit reports.
Tips for Using Your First Credit Card
— Make paying in full a habit. Track your charges as you go along and stop before the balance becomes stressful.
— Automate payments. “Enroll in the bill pay system right away,” Goldman says. “You won’t have to worry about making your payments on time.” The money will be deducted from your checking account when the bill is due, and you may be able to arrange for a complete or partial payment.
— If you must revolve a balance, commit to paying it off as soon as possible. When your card is at a zero balance, you can start charging again.
[Read: Best Student Credit Cards.]
Advice for Parents Helping Kids Choose a Credit Card
As a parent to a young adult, Robinson-Jones recommends parents play a part in their child’s credit card research process. Compare cards the child is qualified for.
“Guide them to the card that will really help them,” Robinson-Jones says. “It should have good mobile tools so they can track charges and pay with their devices. Talk about interest, and find the card that has the lowest APR. They may want to buy something expensive, and that rate will matter.”
Credit card management isn’t intuitive, so parents should explain what to know about credit cards, such as how to make payments and steer clear of debt, and how rewards work. Review the rewards programs associated with different cards. For example, a flat-rate cash back card may be easier to understand, but your child may come out ahead with a tiered rewards program that offers a higher rate on certain purchases, like at restaurants and gas stations.
Don’t Delay: Establish Credit Early
A great credit reputation doesn’t happen overnight. Starting when you’re young with your first credit card and using it strategically will pay off, Goldman says. When you have a year or more of excellent credit card activity listed on your credit reports, lenders and businesses will see that you can consistently manage your money and credit.
“Good credit is important for many reasons,” Goldman says. “You’ll pay less for goods and services because you’ll qualify for loans with better rates, and you may even pay less for insurance.”
Keep that first card open and active, even after you apply for and start to use other cards and credit products. It lengthens your credit history and shows consistency. That’s important not just to credit issuers, but to landlords and even to employers. “As soon as you’re ready for a credit card, apply,” Robinson-Jones says. “It sets up a foundation for financial success.”
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What You Should Know Before Getting Your First Credit Card originally appeared on usnews.com
Update 02/15/22:
