Getting Your First Credit Card: What You Should Know
How to Find the Best First Credit Card for You
Getting your first credit card is exciting! But this excitement also brings a lot of responsibility. The best first credit card is one that you know how to use responsibly so you can build your credit. Don’t know what a credit score is? Check out this helpful article from consumerfinance.gov to learn more. Whether you already know the basics, or you’re just getting started, there are several factors you need to keep in mind when researching the best options for your first credit card.
Here are 5 steps to finding the best first credit card:
- Set your goals: list your short and long-term goals
- Learn the ropes: credit card terms and definitions
- Play the field: research and compare your options
- Plan your strategy: learn how to build credit
- Make your move: apply for your first credit card
What are your goals for using a credit card?
Typically, credit lines approve borrowers for larger credit limits if you have a better credit score. If you’ve never had a credit card or a loan before, chances are you have a low credit score. First credit cards are often for people who need to build their credit score by maintaining payments on a smaller, more manageable sum of money.
3 Examples of short-term credit card goals and uses:
- Keep an emergency fund
- Pay for a small to medium sized purchase over time
- Use it for a vacation and get travel perks like car rental insurance or dining rewards
3 Long term credit card goals
- Earn rewards such as cash back on your purchases or frequent-flyer miles
- Build and improve your credit score
- Pay for a larger purchase (like a car) or debt over time
What are the main credit card terms and definitions?
If you understand credit card terms and agreements, you’ll be more likely to gain the maximum benefits. Some credit card features to consider are details like types of fees, APR vs interest, financial management practices, and more. It’s best to know how to avoid pitfalls that can ruin your finances. Let’s go over a few terms you should know when looking for your first credit card.
APR vs. Interest
An interest rate is the price to borrow money from a lender. It’s expressed as a percentage and is charged on the principal loan amount. When it comes to your credit card, that loan amount is the card balance. Annual Percentage Rate (APR) is interest plus any associated fees for many loans. For credit cards, interest rate and APR are the same.
Even though interest rate and APR can be used interchangeably when considering credit cards, pay attention to whether the rate is variable or non-variable. A variable-rate can change. Also, if you pay off your balance each month, you can usually avoid paying any interest.
Credit Utilization Rate
Your credit utilization rate is the amount of revolving credit you’re using. It’s divided by the total amount of revolving credit that’s available for you. Simply put, it’s how much you owe divided by your credit limit and normally shown as a percentage.
A credit utilization ratio is focused on a borrower’s revolving credit. But, when managing credit balances, it’s best to know your current debt to income ratio (DTI). This ratio takes into account both revolving and non-revolving credit and is another factor when a credit application is submitted.
Another important credit card tip is to always keep your rate below 36% if possible. Having a low credit utilization rate means you’re not using much of your available credit. Credit scoring models view this as positive credit management as not making purchases helps you achieve a higher credit score. If you have a higher credit score, this makes it easier to secure more credit.
What is the best first credit card?
After you understand the basic terms and definitions of a credit card contract, it’s time to start researching and comparing your options. You’ll want to narrow down the best options for your situation and weigh the pros and cons. Some cards may have special offers like a signing bonus.
If you are applying for your first credit card, you may not qualify to borrow from a higher limit credit line. That’s okay. You’ll need to build your credit first before a financial institution will lend you larger sums of money.
Main questions to ask yourself when researching your first credit card:
- What is the interest rate or APR?
- What are the annual fees, if any?
- What is the credit limit?
- What is the penalty for late payments?
Depending on your goals, you may have more specific questions. For example, if you plan on using the card for an international trip, you will want to find out if there are any foreign transaction fees. The best first credit card is generally one with a low rate, no annual fees, and no balance transfer fees, like the UCCU Low-Rate Visa.
How does building credit with a credit card work?
One of the best credit card tips you can be given is to build credit. Increasing your credit line gives you more flexibility and allows for larger purchases to be made. A credit line increase also gives you the chance to improve your credit utilization. Want to learn more about your current credit score? Visit credit.org for more information. Here are a few ways you can do that:
- Reduce your credit utilization: A benefit of a credit limit increase is that it can have a positive impact on your credit. For example, let’s say that you doubled your credit card’s limit and left a remaining $600 balance unspent. In effect, your utilization would drop by 30%, which would be considered positive.
- Maintain a low balance: If you have a higher credit limit that you quickly spend, you risk increasing your utilization rate. The best way to improve your utilization ratio is to pay down your credit card balance and keep it low.
Below are 3 mistakes to avoid:
- Missing payments: Payments take up a large amount of your score and are the most important factor. Missing one payment can lower your score and be a huge mistake.
- Applying too often: Too many changes, such as requests for credit over a short period, can negatively impact your score. Be sure to only apply for new credit if needed.
- Overspending: It’s best to leave your credit card alone if possible, for the best financial scenario. If you don’t spend much money, don’t request an increase because you’re risking further credit damage.
Always Maintain Good Credit
Maintaining good credit is one of the best first credit card tips you can be given. A positive credit score allows you to maintain long-term good standing with your bank. It also means future financial options and possibilities. Here are some ways you can maintain good credit:
- Pay your loans on time: Always stay current on your payments and don’t miss even one!
- Don’t get close to your credit limit: Credit scoring models look at how close you get to maxing out. Keep your balances as low as possible and spend wisely, if at all.
- A long and positive credit history helps: Credit scores are based on your overall history. The more your credit report shows timely payments and fewer purchases, the better your score will be.
- Only apply for credit you need: If you make many credit requests in a short period, your economic circumstances may be viewed negatively by lenders.
- Fact-check credit reports: If you suspect possible errors, call and dispute them. Keep an eye out for any possible mistakes or thefts.
First Credit Card Tips: Be Responsible
A credit card is a major responsibility. As a first-time credit cardholder, you may be anxious to spend. But take your time, learn what you should and should not do, and pay attention to the big picture.
You now know that interest is important to your finances and credit history. Learn more about what exactly interest is and how it affects you!
What is a credit card application like?
So, you’ve found the best first credit card for you and you’re ready to apply. Now what? Credit card applications are generally easy to complete online. Just make sure you have the information you need before you start your application. Common information needed for a credit card application:
- Social Security or Individual Taxpayer Identification Number (ITIN)
- Housing Costs (How much you pay in rent, rental utilities, or other monthly costs you pay for housing (ie Internet)
Now that you know the 5 steps to finding the best first credit card for you, you’re ready to start the search! Remember, the best card is one that you fully understand. Using a credit card responsibly, you will be able to gain the maximum benefits while maintaining healthy credit. UCCU also offers Credit Builder to those beginners who are looking to build their credit fast and begin understanding loan interest rates