Getting your first credit card soon? Welcome to adult life! Trust us, this is a huge milestone that will require a big adjustment in the way you spend and think about money.
Understanding the ins and outs of credit cards can be the difference between building your credit or ruining it. In retrospect, there were things we all did initially that we wouldn’t have done had we known better.
That’s why, in this post, we’ll explore some of the important things to know before getting your first credit card.
- First-timers don’t get the best credit cards.
As a newbie to credit, you would not get a credit card with the best benefits, like big sign-up bonuses and favorable interest rates. Why? Those glowing cards are reserved for applicants with very good credit scores (>750). As a beginner, you neither have a credit score nor a credit history.
Thankfully, there are credit cards primarily targeted at people without a credit history. Examples include student credit cards and secured credit cards.
A secured credit card is backed by cash deposited into the account. In the event you’re unable to make monthly payments, the creditor can easily settle themselves from the deposit. This lowers their risk of giving you a credit card.
- Check out the rates and fees before applying.
I know you’re excited to get your first credit card. But hang on a second. Credit card issuers offer a wide range of terms, including interest rates and fees. While federal laws require issuers to publicize their terms, it’s up to you to make sure you check them out.
Things to consider include the annual fee, annual percentage rate (APR), foreign transaction fees, and late fees. Make sure you look out for multiple issuers before settling for one that works best for you.
Note that, in most cases, you won’t know your credit limit until your application is approved.
- Try to pay more than the minimum monthly requirement
When receiving your first credit card, here’s what may be suggested to you:
You can certainly pay the full amount but know that you can get along fine by just making this smaller amount.
Ignore such suggestions! Make up your mind to always pay more than the minimum. But why is that?
When you make only minimum payments, most of the money goes towards clearing the accrued interests and fees (if any). With little going towards the debt itself, you get trapped into this vicious cycle. That’s why some people keep paying off credit card debt for years on end.
I didn’t know that was the case, but thank goodness I discovered it soon enough.
- You pay dearly for late payments.
Whatever happens, try to avoid late payments as it will only lead you into further debt. Here are some of the consequences of late payment:
1) Late fees: A late fee is a charge imposed on consumers that fail to make the payment on a debt by the due date, even if it’s just by a day. Late fees generally range between $25 to $50.
2) Penalty APR: As noted earlier, rates for beginners tend to be high because of their lack of credit history. Guess what happens when you miss a payment? You guessed right! Your interest rate is further increased. Penalty APR can be as high as 30% or more for new transactions. Failure to make payment in the next 60 days may cause the penalty APR to be applied to your outstanding balance.
3) Damaged credit: If you’re 30 days late to make a payment, it will be recorded in your credit report, and that will hurt your credit score. As a newbie, the last thing you want is to start your financial journey with bad credit.
Note that late payment, even if it is a result of forgetting to make payment, will still have a devastating impact. That’s why automating payments is a great idea.
- Avoid spending too close to your credit limit.
If you’ve been given a credit card with a $1000 limit, know that spending too close to the limit will negatively impact your credit score. But why is that?
The credit utilization ratio (CUR) is an important factor considered when calculating a credit score, and it contributes a whopping 30% of your score. CUR measures your credit card debt compared to your total credit limit. So if you have a debt of $700 on your credit card with a $1000 limit, your CUR is 70%.
As a heuristic, always try to keep your CUR below 30% at all times so it doesn’t affect your credit score. So, that means you should never spend more than $300 on a card with a $1000 limit.
Armed with this knowledge, you can now go for your first credit card. But make sure you use it wisely, so it serves as a good foundation to build good credit.
Contact us here today with any questions you may have! We look forward to working with you.