Getting Your First Credit Card: What You Should Know
Getting your first credit card is exciting! But this excitement brings with it a lot of responsibility. There are several factors you need to be aware of when it comes to owning a credit card.
Some first credit card tips to consider are details like 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 tips on what you should know!
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.
How to Get a Credit Limit Increase After Building Credit
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. An increased credit limit also gives you the chance to improve your credit utilization.
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.
Here are a few 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 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 Credit Card Interest and How Does it Affect Me?