Choose Your First Credit Card

Opening your first credit card is an important step towards financial independence in a young adult’s life. Credit cards are a great way to build your credit history, to make large purchases, and to use during emergencies. However, you should proceed carefully. As with most financial decisions, there are risks and benefits associated with opening and using your first credit card. If you weigh your options carefully and are aware of the risks, opening your first credit card can be hassle free.

Steps

Evaluating Your Current Financial Situation

1. Find out what your credit score is. Your credit score is a number from 350 to 800 that represents your creditworthiness.
   • You can check your credit score by requesting a free copy of your score from one of the three major credit reporting agencies: Equifax, Experian, and TransUnion.
   • Since this is your first credit card, you may not have much of a credit history or you may not have any credit history at all.
   • If you have a higher credit score, you may be eligible for better offers with lower interest rates and higher credit limits.
2. Build your credit history. Credit cards are a great way to build credit history, but if you don’t have any credit history, it is more difficult to be approved for a credit card. There are a few different ways to build credit that can make it easier to be approved for your first card.
   • Apply for a secured credit card. These cards require a cash deposit and people with no or little credit history can apply and be approved more easily.
   • Use a co-signer on your credit card application. A co-signer essentially vouches for your ability to pay back your credit card debt. If you misuse your credit card and build up debt, this can negatively effect the credit score of your co-signer.
   • Become an authorized user of someone else’s credit card.
3. Understand the risks. When used properly, there are benefits to opening your first credit card. However, first time users are at risk of abusing them and piling up credit card debt.
   • In 2015, the average American household had over $15,000 in credit card debt.
   • Having high amounts of debt can limit your ability to get approved for loans, to own a home, and is a financial burden on yourself and your family.
   • When you receive your first credit card, it’s important to establish good financial habits and to avoid accumulating unnecessary debt. Setting and following a budget is a great habit to establish.
4. Set your budget. Credit cards are useful because they allow you to purchase items on credit, rather than immediately taking money out of your account, but it is important to follow a budget.
   • Know how much you can afford to spend each month. You will need to pay at least 2% of the balance in every billing period.
   • It is highly recommended that you pay your entire balance off each month so you do not accrue interest.
   • Know the benefits of having a credit card. A credit card is a good way to build your credit, which can help you to qualify for lower insurance premiums, loan rates, and to help you be approved for an apartment.

Comparing Different Credit Cards

1. Look at your options. There are dozens of different types of credit cards out there so it is important to consider your options when deciding on your first card.
   • Credit cards are issued through financial institutions, retailers, banks and other lenders.
   • If you have a debit card now and are happy with the services you receive from that bank, you can consider applying for a credit card through them.
   • Many of us receive “pre-approved” offers from credit card issuers that target first-time credit card users. While they may be tempting, you still need to do your research to see if it is the best option for you.
2. Know the age and income restrictions. The length of time you have credit built is an important factor in your credit score and qualifying for future credit, but it is harder to get a credit card when you’re younger and have less credit history.
   • Credit issuers are more hesitant to issue credit cards to people under the age of 21, but you can work around this.
   • If you are under 21, you will need to demonstrate that you have a full time source of income. If you do not work full time, you will need a parent or another adult to co-sign with you on your application.
   • Credit card restrictions loosen after you turn 21 but you will still need to provide documentation that you work either full or part time and have a steady source of income.
3. Compare secured and unsecured credit cards. There are two main types of credit cards, secured and unsecured, so it is important to know which type you qualify for.
   • Secured credit cards are backed by a cash deposit, which is usually the amount of the card’s credit limit. This means that if you receive a card with a $1000 limit, you will need to put down $1000 as collateral to remove the risk of nonpayment for the card issuer.
   • Secured credit cards are usually offered to people without extensive credit histories, or who have poor credit.
   • Unsecured credit cards do not have a cash deposit. You will get a credit limit based on your income level and your credit history.
4. Find out if the card offers a standard monthly billing cycle. Some cards expect a payment every two weeks while others use a 30-day cycle.
   • Ask if there is a penalty for not using your card.
   • Write the billing date down! You will need to pay your bill on time to avoid accruing interest or late payment charges.
   • Many cards offer a grace period. When you use the card for the first time, the bank loans you money to make that purchase. The credit card company will give you a grace period, usually 20-30 days to pay off that purchase without accruing interest.

Selecting the Right Card

1. Look at the benefits. Different card issuers offer different types of benefits when you open a card. These may be promotional benefits that last for a set period or they may be used throughout the lifetime of the card!
   • Some cards offer 1% or 2% cash back on all purchases, no annual fee, credit points toward purchases, or promotional interest rates.
   • Benefits should not be the main reason you choose a certain card, think of them as icing on the cake!
   • If you are a student, you may qualify for special offers and promotions.
2. Look at interest rates. Remember, the interest rate is dependent upon your credit history, so the rates you are offered may change over time. That being said, if this is your first credit card and you have little credit history, you will most likely be approved for a card with a high interest rate.
   • The interest rate will be applied to the remaining balance on your bill if you do not pay it off each month. You should always try to pay your balance in full so you avoid incurring additional interest charges.
   • Know your interest type. Some cards charge interest from the date of purchase, while others charge interest from the billing date.
   • If you are offered a promotional interest rate, find out the terms of payment and when the rate will expire. Most cards apply payments to lowest interest charges first, leaving your higher interest charges to collect interest until the entire amount is paid off.
   • A high interest rate for your first card is not unusual, especially if you have little or no credit history. As you use your first card responsibly, you may qualify for better rates.
3. Ask about fees and charges. There can be a variety of different fees that may be applied to your card, which could make some cards better options than others.
   • There may be an annual fee, an application fee, an account service charge, an over-limit fee, a late-payment fee, a cash advance fee, and other miscellaneous fees.
   • Compare these fees to other cards, along with their interest rates and other benefits to make sure you find the best card for you.
4. Apply. There are typically three ways to apply for a credit card: through the mail, over the phone and on the Internet.
   • Once you have decided on the right first card for you, you will need to apply for it with the card issuer. They will either accept or deny your application for credit.
   • While a lot of this decision is based on credit history, credit issuers realize that first time card applicants will have very different credit histories than more established credit card users.
   • Card issuers will usually ask about your current income and the current balance in your accounts. They use this information to decide what sort of credit line to assign you, and will commonly ask for proof of income as part of the approval process.
   • You do not have to have a bank account to open a credit card, but you do need to prove that you have a source of income so the card issuer knows you will pay back your purchases.
5. Activate the card. Activating your card usually involves calling in to the credit issuer to confirm that you have received it.
   • Sign the back of your card before you begin using it, this adds an additional layer of security.
   • You can use the credit card wherever they are accepted, online or in person.
   • If your card is ever lost or stolen, contact the credit card issuer immediately. If your card has been used fraudulently, freeze the credit card immediately with your issuer.

Tips

• Pay off your entire bill each month (billing cycle). Set a budget on how much you can pay off in one month.
• Spend your money wisely, and make your payments on time.
• Use your card only within your budget. Do not purchase items that are too expensive, just because you have credit. If you cannot afford to purchase an item, don’t use a credit card to purchase it.
• Check your credit score yearly. As your credit grows, you may be eligible for lower interest rates or additional benefits.

Warnings

• If you find you cannot make your monthly payment, stop using the card immediately. Continue to pay down your balance but do not make any purchases with the card.
• Avoid opening multiple credit cards at once, this can negatively effect your credit score.

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Sources and Citations

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