Getting your first credit card is a rite of passage to adulthood. It shows that you’re independent and responsible enough to handle your finances on your own. More importantly, opening a credit card can also help you build your credit score so that you can purchase a home, a car, or even open your own business one day.
However, you can quickly accumulate debt if you don’t read the fine print carefully, or if you spend beyond your means. Here are some things to look out for when you’re first getting a credit card.
Regardless of which credit card you select, one of the most important concepts to understand is your credit score. Technically speaking, it’s a numeric rating assigned by three different credit bureaus. You may see the term “FICO,” which is your credit score calculated with software from Fair Isaac Corporation. Your score is usually determined by whether you pay your bills on time, how much debt you have, how many credit cards you have, as well as a number of other metrics.
Your credit score can range from roughly 300 to 850, and the higher the number, the better. Generally speaking, a rating over 700 suggests good credit. Your credit score is important because it can impact the cost of your borrowing. Some employers may even do a credit check before offering you a job. With a poor credit score, you may not be able to rent that nice apartment you want.
Here are a few tips to help improve your credit score:
- Pay your bills on time
- Reduce your overall level of debt
- Pay your credit card bill in full on a monthly basis
- Do not max out a credit card
- Do not hold too many loans or credit cards, as it can hurt your rating
- Check credit report annually and report any errors
APR stands for “annual percentage rate” and it’s the interest that you’ll be charged on any amount that you didn’t pay in full from your last statement. If you pay off your credit card balance in full every month, you won’t have to worry about APR. Typically, APR rates can range from 15% to 20% or even higher, especially store-specific credit cards. In general, the lower the APR, the better. However, some credit cards offer reward programs tied to the use of their cards (usually in exchange for a higher APR), but it may be worth taking that into consideration depending on how the reward program is structured. If you have a strong credit score, you can also call your credit card company to negotiate a lower APR on an existing card.
Sometimes annual fees are imposed on a credit card. These are often found in travel reward credit cards, which may provide you with extra benefits such as travel insurance, extended warranties or the reimbursement of international transaction fees. At first, having to pay an annual fee might seem like a waste of money, but the rewards you receive from it can sometimes outweigh the cost. It only makes sense to get a card with an annual fee if you’re planning on spending a lot of money with that card. If you’re just starting out and don’t spend too much, then a card with an annual fee might not be right for you.
If you don’t want to get a card with an annual fee, plenty of “cash-back” credit cards have no annual fee and still offer rewards.
Other Fees and Penalties
Credit card companies also offer a payment grace period where they give you time to make the full payment on your balance. It’s important to keep an eye out for when your monthly payment is due, as late fees incurred for missing a payment can not only be costly but can also hurt your credit score. With some credit cards, one late payment can cause your interest rate to rise significantly.
Other common fees include cash advance fees, international transaction fees, balance transfer fees, or fees for going over your credit limit. Take a few minutes to read the fine print on a card before opening an account—it can save you a lot of money and stress in the long run.
Two Other Types of Credit Cards
There are two other distinct types of credit cards that you might use when you are just starting out.
- Secured credit card can help those who have a poor credit score, or are just starting out. It’s called a “secured” card because you have to put some money down ahead of time. If you’ve had poor credit in the past, some credit card companies might not trust that you will make your payments at the end of each month. Having a secured credit card proves that you’ve paid up front and reduces the risk for the company if you don’t pay your bill by the end of the month.
- Student credit card. While typically reserved for college students, it’s a great way to start building credit when you’re still in school. The only stipulation is that many require you to have access to a reasonable income and if you have no credit history at all, it might be difficult to get one. Some companies offer the option for parents to co-sign the card. That means if you ever default on paying your bill on time, your parents must legally assume responsibility for making the payment. You can see why some parents might be reluctant to co-sign a card for their child if they’re not very responsible, as it can hurt both the parents’ and the student’s credit score.
Opening a new credit card is a decision that should not be rushed into or done on a whim when a store cashier mentions a special offer. It’s important to take the time to compare the details of each card and how it might affect your individual situation. The right card can help you minimize potential interest payments, redeem rewards and build your credit score all at once.
No content published here constitutes a recommendation of any particular investment, security, portfolio of securities, transaction or investment strategy. To the extent any of the content published may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person. Consult your advisor about what is best for you.
Securities offered through M.S. Howells & Co., Member FINRA/SIPC. Advisory services offered through Jemma Investment Advisors, LLC, a registered investment advisor. M.S. Howells & Co. and Jemma Investment Advisors, LLC are not affiliated.