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How to Choose Your First Credit Card
Getting your first credit card is a massive step towards financial independence. But, if you didn’t grow up in a household that talked openly about money and personal finance, you may not know how to pick a good first credit card or understand why you should get one in the first place.
To be clear, you will need a credit card in your adult life for things like buying a plane ticket, renting a car, and, most importantly, building credit. Unfortunately, many of us don’t build credit while in college because we aren’t paying bills contributing to our credit score, explains Emily Thompson, Credit Cards Writer at The Points Guy. “When it’s time to take out a car loan or get a mortgage, many people have this huge hurdle despite financially responsible habits.”
However, it is imperative to start building your credit score as early as possible. Years of responsible spending on a credit card can establish you as a trustworthy candidate for future loans for bigger things like cars and homes. Here’s how to get started.
Before You Apply: Your Credit Report and Credit Score
Even though it sounds counterintuitive, you should review your credit report before applying for your first credit card. Because some cards are only available to people with good or excellent credit, you may waste your time applying for cards you won’t qualify for. You’ll see a history of prior credit behavior when you first check your credit report. If you have student loans, for example, you should see them. You may not have a credit report if you don’t have student loans or have never borrowed. That’s not something to be alarmed about. In fact, it’s the opposite. If you’ve never borrowed, a thick credit report with a lot of information indicates that you may have been a victim of identity theft. Either way, read it carefully for any inaccuracies and dispute them with the credit bureaus if you find them. You can get your FREE credit report at annualcreditreport.com.
Next, let’s focus on your credit score. A credit score is a three-digit number typically ranging from 300 to 850. Your credit score is based on information in your credit reports taken from three main credit reporting bureaus (Experian, Equifax, and TransUnion). They serve as information gatherers and report on your borrowing activities from financial institutions and public records.
Your credit score helps financial institutions and other businesses decide how much of a financial risk you are. It is based on your borrowing history and several other financial behavior patterns. A low score can indicate to a lender that you could be more likely to pay late or default on a loan. Conversely, the higher your score, the better the rates you’ll qualify for with mortgages, auto loans, credit cards, and other types of loans.
Again, if you’re new to credit, there’s a chance you won’t have a score at all. Don’t let this discourage you. While this means that while you likely won’t be eligible for a fancy platinum card, as long as you have income, you should be able to get a solid starter card that’s perfect for your needs as a first-time credit builder.
“It’s important to adjust your expectations because a lot of what we think of with credit cards, in terms of rewards and things like that, just aren’t going to be available to you on that first credit card,” states Matt Schulz, Chief Credit Analyst at LendingTree. “But that’s okay — the goal right now is building your credit and paying your bills on time, every time. The rewards can wait.”
What to Know About Your Credit Limit and Interest Rate
When you get approved for a credit card, the financial institution will assign a credit limit to you or the maximum amount you can borrow. And when you’re starting out, this number will be low (probably ranging from $200 to $2,000). Remember: This is a credit limit, not a spending goal. A good rule of thumb is never to use more than 30% of your credit limit because your credit score will suffer if you exceed that mark.
Paying on time every month and always paying your bill in full help to avoid the downsides of borrowing money: interest charges and late fees. With that said, things happen, and you may occasionally have a month or two where you need to carry a balance. Make sure you always pay at least the minimum since late fees can add up quickly. Plus, paying late damages your credit score, which is the last thing you want when building credit.
In terms of interest rates, even good first credit cards usually have high interest rates. “If you can find a card in the low 20% range, you should probably scoop that up,” Schulz says. “But don’t be too surprised if your interest rate is 25% or higher.” Of course, this makes it even more critical only to charge what you can comfortably repay at the end of every month. You’re not paying interest at all if you’re not carrying a balance!
What to Know About “Secured” Cards
Have you ever heard of a secured credit card? For people with little to no credit history, secured cards can be a great way to start building credit. Essentially, secured credit cards work by putting down a deposit (usually around $500), which then becomes your credit limit for that account. Because your limit comes directly from a deposit you put down when opening the account, there’s virtually no risk to the financial institution —almost anyone can get approved.
“I’m a big fan of secured cards for somebody’s first card because they minimize the risk to everybody involved,” Schulz explains. “Secured cards can be a great stepping stone, but it’s also something that you shouldn’t have for all that long.”
The only downside is that once you deposit money into your credit account, you can’t use it for other things — and you also can’t increase your credit limit without putting more money down. So, while secured cards can be great if they’re the only credit card option you qualify for, plan to try to upgrade to a traditional credit card after you’ve established a track record of 12-18 months with on-time payments.
How to Shop for the Best Card
Now that you know how credit cards work, it’s time to choose the first card to go in your wallet. As much as we wish the “ultimate beginner” credit card existed, it doesn’t.
“There’s not a one-size-fits-all answer for the best credit card,” Schulz says. “It really is about what you want from the card, how you spend on the card, and how comfortable you are with managing your credit card.”
Start by focusing on the cards available for someone with your credit score, and then start comparing everything about those cards, including interest rates, fees, any rewards offered, and other perks. And make sure you check with your credit union to see what’s on their menu as well — often, the interest rates and fees are lower.
Whatever you do, do NOT fall into the trap of going into credit card debt to earn rewards — you’ll never come out ahead. “The interest rate is way higher than the value of the rewards you’ll earn,” Thompson says. “You might end up earning a 5% return on your spending with your rewards, but if you’re then paying 25% in interest, that’s not a good deal.”
Got Your Card? Congrats! Now It’s Time to be a Responsible Credit User
Getting approved for your first credit card is a huge deal — but it’s only the beginning. To build the kind of good credit that will set you up for a stress-free financial life, you’ll need to pay every bill on time and always try to pay your balance in full. Set a budget for yourself, treat your credit card like regular cash (not an infinite resource), and you’ll be in great shape.
To learn about the Secured Visa Card at SCCCU, click here.
- CATEGORIES: Financial Education