Things to Know When Applying for Your First Credit Card
Getting your first credit card is a major step financially. When applying for credit you can choose from secured and unsecured credit cards. Your first credit card can be a useful tool when you use it correctly. However, it can also get you into trouble if you spend beyond your means. Here are ten things to know before applying for credit.
One reason so many people end up with credit card debt is a lack of knowledge. Understanding how credit cards work will help you avoid issues and get the most out of your first credit card. Here’s what you need to know starting out with new credit.
10 Things to Know Before Applying for Your First Credit Card
1. What a Credit Card Is
Regarding appearance, a credit card is very similar to a prepaid card. The difference is how a credit card works when you use it. When you pay for something with your credit card, your card issuer pays the merchant. The card issuer then sends you a bill after each billing cycle with all the purchases you made.
A billing cycle is usually 30 days, and you have a short period after that before your credit card payment due date.
2. Your Credit Limit
Every credit card has a credit limit, which is the maximum amount that can go on the card. If a transaction would put your credit card over its credit limit, then the transaction will be declined.
Credit card companies base your credit limit on several factors, but the two most significant are your credit score and your income. If you’re getting your first credit card and you don’t have a high income, you could start with a low credit limit of $500 to $1,000. After paying your bill on time diligently, you can ask your card issuer to raise your limit later.
3. Paying Your First Credit Card Bill
When you get your first credit card bill, you’ll notice that there’s a minimum payment and a statement balance. The minimum payment amount will be much smaller than the statement balance.
The minimum balance is the amount you need to pay by the due date to avoid any fees. To avoid interest charges, you need to pay the statement balance. If you don’t pay your full account balance, then your credit card company will charge you interest on the unpaid amount.
Paying only the minimum balance has led to years of credit card debt for many consumers. If you only pay the minimum balance every month, it can take decades and an enormous amount of interest before you’ve paid off what you owe.
4. Applying for Credit – Secured and Unsecured Credit Cards
Just like with loans, there are secured and unsecured credit cards available. The difference is that secured credit cards have collateral attached to them, with the collateral being a cash deposit. This deposit mitigates the card issuer’s risk. Deposits are typically the same amount as the card’s credit limit.
Unsecured credit cards don’t have a deposit. If you don’t pay your balance, the card issuer will need to send the account to collections. There are many different types of credit card applications for bad credit so compare and weigh out your options.
Secured credit cards are common for those with limited credit history getting a first credit card. Individuals like yourself who are new to credit should consider a secured card with low fees. If you’ve paid off your card’s balance, the card issuer refunds your deposit when you either cancel the card or switch to an unsecured card.
Are you a college student and new to credit? If you are a student consider applying for a student college credit card. Student credit cards are unsecured. Many student cards offer rewards and no annual fees. Before applying for credit compare the different secured and unsecured credit cards available.
5. Your New Credit Score – How to Build and Establish Good Credit
How you use your credit card is one of the most significant factors when it comes to your credit score. Three credit reporting bureaus track your credit history and calculate credit scores for you. While your score can vary from bureau to bureau, they all use the same factors when calculating your score.
Payment history is the most significant factor in determining your credit score. This is your history of paying your bills on time. Payment history includes any company that reports to the credit bureaus. Your credit card company definitely will, so it’s crucial that you pay your bill for that by the due date. If you are new to credit and have no established credit history, on-time credit card payments are crucial in building new credit.
Close behind payment history regarding importance is your credit utilization. Credit utilization is how much of your available credit you’re using. For the best score, you want to keep this below 25 to 30 percent. If you have a credit limit of $1,000, avoid carrying a balance of more than $250 to $300. Note that credit bureaus can check your credit utilization at any time. If you’ve recently put a large purchase on your credit card, pay it off as soon as you can instead of waiting for your due date.
Three Smaller Factors That Make Up Your New Credit Score
Three factors that aren’t as significant but still play a part in your credit score are your age of accounts, your types of accounts and new credit applications. Credit bureaus look at how long you’ve had credit accounts open or age of accounts. Longer credit account histories result in a higher score. Plan to keep your first new credit card for as many years as possible.
Having multiple types of credit accounts, such as a credit card and a loan, are better for your score than only having one type of account. Credit mix is only a minor factor, though, so it’s not worth applying for a loan just to improve your score. Finally, when you apply for new credit, it results in a hard inquiry when the lender checks your credit. This credit inquiry temporarily brings down your score a small amount.
6. Credit Cards with EMV Chips
Credit cards originally used magnetic strips to transmit information. Card issuers then started using cards with small EMV microchips. This was popular in Europe for years, and now the United States has made it standard, as well.
For consumers, the only difference is that you insert a credit card with an EMV chip instead of swiping it. This EMV credit card chip is much more secure, as chip cards transmit more data and are harder for criminals to duplicate. Because of EMV chips, many types of credit card fraud become more difficult to achieve such as credit card skimming.
7. Credit Card Fees – Secured and Unsecured Credit Cards
Credit cards have many different credit card fees, although sometimes you can avoid credit card fees. As previously mentioned, failing to make your minimum payment on time results in a late payment fee. Keep track of your due date, and you’ll never deal with this.
Credit cards charge interest fees when you do not pay your balance in full. Reduce credit card interest fees at all costs.
You can opt into an over-the-limit fee, which you incur if you go over your credit limit. If you don’t opt in, your card issuer will likely decline the transaction.
Using your credit card in foreign countries can result in a foreign transaction fee. Credit card foreign transaction fees range from 2-4%. Many credit cards have no foreign transaction fees, so get one of those if you plan to use your new credit card while traveling.
Transferring your balance from one credit card to another will result in a balance transfer fee. Consumers transfer balances to pay less interest on a credit card balance, although you’re far better off not carrying a balance at all.
You can get a credit card with or without an annual fee. Some consumers avoid annual fees at all costs. With your first credit card, this is a smart decision. When you know how to maximize credit card rewards, you may decide to get a card with an annual fee for the reward opportunity.
8. Look for the Best Credit Card Rewards when applying for credit
Most credit cards offer reward benefits, which allow you to earn a return on your spending. Cashback is the most basic type, making a cashback card an excellent choice for your first credit card. You earn a set amount, typically 1 percent, back on all your spending.
Airlines offer credit cards that earn frequent flyer miles. You can redeem your miles with the airline for free flights or flight upgrades.
Many credit cards earn reward points. You can redeem these for cashback, products or travel rewards. The best deals are typically available when you redeem your points for travel rewards, although it takes some time to learn how to best use your points.
Some reward credit cards also have signup bonus offers available. To make use of the offer, you must meet a minimum amount of spending within the first few months of having the card. For example, a card issuer may give you $300 cashback if you spend $2,000 in the first three months that you have your card.
9. Checking Your New Credit Report
The three credit reporting bureaus are Experian, Equifax, and TransUnion. Credit card laws entitle you to one free credit report per year from each bureau. You should do this every year so you can check your scores and see if there are any mistakes on your reports. If you find an error, report it to the bureau that issued the report and the creditor that reported the inaccurate information.
10. Staying Debt Free with your first credit card
Many consumers carry thousands of dollars in credit card debt. When you do that, you pay large amounts of interest and can get trapped in a cycle of debt.
For that reason, you should treat your first credit card just like a debit card. If you don’t have the money to pay for something, don’t buy it. Consumers often make the mistake of charging purchases to their new credit cards, believing that they’ll be okay since they have plenty of time to pay it off. This type of credit charging is a bad habit that can quickly put you in debt.
Know when your new credit card payment is due, so you never miss a payment. Remember that you can always request to change your payment due date if it’s not convenient for you.
The most important thing to do is pay your credit card bill in full every month. Start doing this with your first credit card, and you’ll be in good shape for the future. This is the best way to establish credit history.
There’s a lot you can learn about credit cards before applying for credit. The most advanced credit card users find ways to make themselves money through credit card rewards. With your first credit card, focus on learning how it works and developing the right habits. Once you’ve built up your credit score, you may decide to start looking for those cards with high rewards.
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