Getting your first credit card is a significant step towards your financial independence. Additionally, credit cards are a great way to begin building your solid credit history, which will eventually qualify you for a mortgage, a car loan, or funds to launch a small business. Not to mention, secure your higher interest rates on credit and loans in the future. However, before you apply and own a credit card, you need to be able to charge what you can and be able to afford and pay your bill every month. Hence, an excellent time to start using a credit card is when you are not spending a lot – most likely while you are in college. With that in mind, we have summed up in one article, everything you need to know before getting your first credit card.
Assess your spending habits
Before you even think about applying for a credit card, consider having a budget in place, and carefully assess your spending habits. Do you have late fees on your utilities or other monthly services? Or are you often living paycheck to paycheck? If that is the case, a credit card might be a bad idea at the moment. You want to be sure you are able to handle the responsibility of a card because once you get it, the temptation to overspend is continuously present. Therefore, having a budget can help you establish and stick with responsible spending habits. As an idea, try building up a savings account before opening a line of credit. A savings account is an excellent proof that your budget is going well. Moreover, it can also help you in the event of an emergency.
Consider the pros and cons of having a credit card
A credit card is one of many forms of payment, such as cash, debit cards, and checks. However, credit cards are so popular because they also offer convenience and benefits. They typically give greater security than many other forms of payment. For instance, if your credit card is lost or stolen, nearly all card issuers have a $0 liability policy. Also, credit issuers monitor transactions, so they can flag you if something seems suspicious – thus avoiding fraudulent purchases. A significant advantage is that many credit cards allow you to earn valuable rewards in the form of cashback, miles, or points. Lastly, a credit card also allows those who are new to credit to build their credit history.
Despite the advantages of having a credit card, there are other factors to consider. For example, credit card users have the potential to accumulate too much debt if they don`t manage their accounts responsibly. And, credit card accounts can also mean fees, interest, or other related costs.
Understand that you need credit to be able to build credit
If you do not have any credit history, getting your first credit card can be tricky. Why? Because to get credit, you need a credit history. That is one of the primary factors that credit card issuers consider when approving an applicant. So what can you do? The best thing is to visit the bank where you already have an account and tell them you want to start building a credit history with a credit card. Most likely, they will allow you to begin with a low-limit credit card. Another option is a secured credit card—an account that requires you to have cash in a bank account to cover any purchases you make with the card. Unlike a debit card, secured credit cards do build your credit. And, in most cases, you can ask your bank to upgrade your account after a year or so of responsible usage.
If you are under the age of 21, you need to have a verifiable income (from a job, government benefits, or child support) before a credit card without a co-signer can be approved. If that is not the case, you will need a co-signer on your credit card application.
Pick the right credit card
If you have been an authorized user on your parents` account for a couple of years, it will be easier to get approved for the credit card of your choice. And, if you have a full-time income, you will have the opportunity to choose from the best credit cards available. Choose card intended for people with fair credit or, if you know your credit is good, good credit. Though the best card for you will ultimately depend on your unique financial situation, there are a few things to keep in mind when deciding on your first credit card:
- Look for a card with little or no annual fee: Since you are a new credit cardholder, you do not want to pay a hefty yearly fee for the use of the card. Annual fees are often linked to higher-end cards, which are designed for big spenders. However, even some more modest cards have fees. That being said, read the agreement carefully when looking at any particular card. Ideally, your first card should have no annual fee attached to it at all.
- Go for manageable credit limit: While you likely won’t be offered a card with a $20,000 limit, make sure you do not agree to a limit that is much higher than what you need. Getting a card with a much higher maximum than what you need can lead to a swirling cycle of debt. Instead, look for a manageable maximum.
- Low-interest rate: The interest rate and the Annual Percentage Rate (APR) are the same with credit cards. It is the cost of borrowing on the card if you do not pay the whole balance off each month. Read carefully and make sure your interest rate is not going to increase after you reach the end of your first year. Compare the APR for different cards. That will help you to choose the cheapest.
- Check for additional charges: Check carefully what other fees apply to the card of your choice. These charges are usually for going over your credit limit, for using the card abroad or for late payments.
- A suitable rewards card: There are numerous rewards cards available. Some will offer travel rewards, while others might offer cashback or points at gas stations. If you do not have a particular reward model you are interested in, think about getting a cash rewards credit card. These will allow you to save up your points and redeem them for money off your statement or cash in your checking account. However, be sure to check that you are likely to qualify for the cashback beforehand.