A credit card is an essential financial tool in today’s world and choosing your first credit can be a challenging decision. If you’re getting your first credit card, you’ll want to consider a few key things before crossing this major money milestone.
You can save a lot of time and money if you understand the basic features of credit cards and how to compare them. With the right card, you can build healthy credit that will open doors to many other financial benefits. You may even earn a bit of extra cash or perks like free airfare or hotel stays.
Everyone has a different financial situation. So, the right card for you will depend on your own budget, income, spending habits and debt load, among other factors.
You may have already a good sense of how credit cards work, but understanding all the basic features of credit cards can help you choose the best card for you.
Here are 10 things to consider before getting your first credit card
1. Check Your Credit Score
Your credit score is a three-digit number that tells lenders how you behave as a borrower. Most lenders use your FICO Score, but some may use VantageScore. If you’re new to credit cards, you may have a lower credit score, which means you probably won’t qualify for any card.
Your credit score will affect the type of credit card you’ll be approved for as well as the interest rate you’ll get. If your score is higher, you can qualify for better interest rates, which will save you money in the long run. If your score is lower, you may only qualify for lower rates – or you may not qualify at all. With lower scores, you’ll want to find a credit card designed to help you build credit.
To improve a low credit score, consider getting a secured credit card, which requires that you make a deposit. That deposit functions like a credit line. Although these cards function similarly to a debit card, your payments will be reported to credit agencies, which can help you establish credit.
You can get a detailed credit report for free each year at one of the three major credit rating bureaus – Equifax, Experian, or TransUnion. Several factors affect your credit score, including the amount of debt you have, the length of time you’ve had credit and whether you’ve made your payments on time. So, once you have credit card, it’s crucial to make payments on time and in full, and to avoid maxing out your credit limit.
2. Understand Your Personal Finances
Scrutinizing your own finances is critical when you are getting your first credit card. Your spending habits and how you manage debt will help determine which credit card is the best one for you.
Take note of where you are spending money and consider how a credit card would come into play. Honestly review your debt, and your plan for paying down your debt. Having an established budget and a full understanding of your financial situation will help you find the credit card that will bring you the biggest benefit.
For example, if you’re a frequent traveler, a travel rewards card may boost your bottom line with more points toward free airfare, hotel stays or rental cars. Or, you may benefit from a general rewards card that returns cash on everyday purchases like groceries and gas.
People who tend to carry more debt would want to consider a credit card with a lower interest rate to help reduce interest costs, which can snowball quickly. Lower interest rate credit cards can also help you get out of debt faster – that is, if you’re making regular payments and avoiding spending.
3. Get Savvy About Comparing Interest Rates
Understanding how interest rates work is essential to getting your first credit card. An APR, or Annual Percentage Rate, is what credit card issuers charge you when you carry debt from month to month.
The higher your interest, the longer it will take you to pay off your debt, and it will cost you more. With a lower APR, you can pay off your balance faster and at a lower cost.
For example, if you have a credit card with 22% APR, a $3,000 balance, and $100 minimum monthly payments, you will pay off your card in 44 months – with an additional $1,395 in interest. In contrast, if you had that same debt on a credit card with a 15% APR, with $100 minimum monthly payments, you will pay it off in 38 months – with $783. That’s a savings of $612 just by having a credit card with a 15% APR instead of a 22% APR.
Of course, to avoid paying any interest, you can pay your balance off in full within the credit cycle. Then, no matter what you APR is, you will not be charged interest.
4. Compare Perks for Better Returns
Each credit card has different terms. Some offer substantial rewards, such as travel reimbursement or cash back, to encourage your loyalty, others don’t. As such, this is something you’ll want to consider when determining your first credit card.
Travel rewards cards are especially popular with frequent travelers because they can save you a substantial amount of money. They work by rewarding you points that you can apply toward hotel stays, airfare or rental cars. If you don’t travel frequently, these cards may not be the best credit card for you.
General rewards cards offer cardholders returns for everyday purchases like gas or groceries, sometimes for specific spending categories. Their offers vary from card to card. For example, you might get 5% cash back on purchase made at restaurants. Or, you could get 1% cash back on all purchases. Rewards terms are diverse, so comparison shop.
5. Read the Fine Print About Fees
Credit card companies charge fees for a number of reasons. Most credit cards have penalties for late payments or making purchases beyond your credit limit.
In the fine print, terms vary from credit card to credit card. Many credit cards charge a fee if you make a purchase in a foreign country, withdraw cash from your credit line or make a balance transfer.
Some credit cards do charge an annual fee just for general service to accountholders. But with the right card, you can avoid paying any fee, even on your first credit card. The key is to stay within your credit limit and make payments on time, and avoid transactions that cost money, like balance transfers or cash withdrawals.
6. Look into Introductory Offers
Some credit cards offer a substantial bonus simply for getting the card. Credit card companies want your business, and they are getting increasingly competitive with their introductory offers.
Typically, an introductory rewards offer will require that you spend a certain amount on the credit card before you get the bonus. But you will not be charged if you pay your balance off. Many introductory bonuses are worth hundreds of dollars.
Other credit cards offer an 0% APR introductory period. For a certain time, they charge no interest. These credit cards are ideal for making balance transfers from a loan or credit card with a higher APR. The 0% APR period can allow you to pay down debt faster and save on the cost of interest.
You may also take advantage of a 0% APR period if are planning to make large purchase like an TV or an appliance. The 0% APR period will essentially give you more time to pay for a large expense without extra cost, giving you a healthier cash flow. It is similar to a free short-term loan.
Note: Introductory offers have become such a huge part of the credit card business that some people take it to extremes using a credit card churning strategy to attempt to maximize the collection of bonuses and rewards.
7. Consider the Impact of Credit Card Debt
While credit cards can help you in many ways, credit card debt is considered one of the most damaging forms of debt to your financial health. If moving into a scenario with your first credit card, be mindful of how debt can change your financial life.
When you begin to incur interest charges as you make purchases, your debt can quickly snowball. It’s essential that you plan to pay off your balances as soon as possible to stay in good financial health and keep your debt manageable.
Credit card debt that is out of control can have a number of negative consequences. First, if your minimum payment escalates to a cost beyond your budget, you may run into trouble with your cash flow. You could have trouble meeting your monthly bill obligations, like rent payments or utilities bills.
Secondly, having substantial credit card debt can seriously damage your credit score. You need a healthy credit score to get affordable loans, mortgages and credit cards. Some employers or landlords also may check your credit score during the hiring process.
8. Make the Minimum Payment … and Then Some
You absolutely must make the minimum payment each month. If you don’t, your credit card issuer will report your late or failed payment to the credit bureaus, and your credit score will suffer. Late payments typically stay on your credit history for about seven years.
Making the minimum payment is important, but you should always strive to pay your full balance. If you can’t pay the full balance, try to pay more than the minimum payment. Even a small amount of extra payment can help reduce your debt faster.
Take the example of having $3,000 in credit card debt with a 22% APR. If you make a minimum payment of $100, you would pay off the credit card in 44 months, paying $1,395 in interest.
Increasing that payment to $150 per month, you would pay down your debt in about half the time – 24 months. Your total interest would be $771. So, just by paying $50 over the minimum payment, you would save $624.
9. Prepare for the Application Process
Applying for a credit card is easy and straightforward. You can fill out an application form online with the credit issuer. You’ll need to provide information like your Social Security number and your income. You should learn within a few minutes whether you are approved for your credit card.
Before you apply, you might want to consider getting a pre-approval, if it is an option. This process usually only requires a “soft pull” on your credit, so your credit score would not be affected. Then, you can learn whether you would likely qualify before you officially apply.
An official application requires a “hard pull,” which has a small negative impact on your credit score. Each hard inquiry results in about a 5- to 10-point temporary drop in your credit score. And the hard inquiry remains on your credit report for about two years. (Although the impact to your credit score usually only lasts a couple months).
So, applying for one credit card has minimal consequences to your credit history. But financial advisors do recommend against applying for several at once because small hits can add up. That’s why pre-approvals can be valuable.
10. Keep Your Credit Card Secure
Once you get your credit card, you’ll want to protect it from fraud and theft. Make sure your information stays safe by setting secure passwords on your account and monitoring your statements for suspicious charges.
If your card is lost or stolen, report it to your credit card issuer immediately. They can put a spending block on it or cancel it. Oftentimes, you can have any charges that you didn’t make removed from your account, but you have to report the missing card quickly.
Don’t use your credit card online over unprotected Wi-Fi networks, because your data may be visible to other users. Also, never email your credit card information to another person. If you have to make a purchase over the phone, make sure you’re reading your card number where others can’t hear you. And of course, never post a photo of your credit card online.
Some credit cards have additional security features like chips that make it more difficult for criminals to steal your digital information. Others include your photo on the card as another way to verifying your identity.
The Bottom Line: Getting Your First Credit Card
Getting your first credit card is a significant step for your financial wellbeing as credit cards bring advantages like convenience, purchase protection and rewards.
Consider your own financial situation and the basic features of credit cards before you begin shopping for the card that’s best for you. Once you do get a card, use it responsibly to to get the most out of its offerings and avoid getting into financial trouble.