Your First Credit Card

“It’s everywhere you want to be.”

“What’s in your wallet?”

Advertisers make sure we’re aware of the power of plastic long before we’re old enough to carry those credit cards, don’t they?   Even though choosing your credit cards based on ad campaigns is not the right way to do it, the advertisers do get one thing right:  Credit cards can be very powerful tools.  And for young adults trying to select that first credit card, making a careful, educated choice can save you a lot of money, as well as helping you to establish and build a good credit history.

When it comes time to buy a car, get a mortgage, or just rent your first apartment, the better your credit score, the better your chances are of getting that loan at an interest rate that’s far more affordable than if you had no credit history.   (Even more important, in this digital day and age, your credit score can even affect your employment opportunities.)

Potential lenders utilize your credit reports to determine how risky it is to give you a loan.  Will you pay the loan back?  Will your payments be late?  Or, will they all be on time, every time?  Essentially, the lender wants to know if you, the borrower, will be able to pay back the loan.  If your credit is bad, then you may have made some major or ongoing financial mistakes and you may be less likely to repay this loan.  On the other hand, if your credit is good or excellent, then you’ve likely established a history of paying back your debt, and the lender will most likely grant the loan.

Credit cards are effectively short-term loans that need to be paid back within a short grace period.  Getting your first credit card can be difficult, especially if you’ve not borrowed any money in the past, and don’t have much, if any, credit history.  But, how are you supposed to establish and build your credit score if no one will give you a credit card?

One of the best ways to establish credit is to apply for a secured credit card. These credit cards are secured by a deposit that you make when you sign up for the credit card. Typically, your credit limit will be the same as your initial deposit, but that’s where the similarity usually ends.  Just like an unsecured card, you’ll be able to use your secured credit card to make purchases, you’ll make monthly payments, and you’ll even have interest charges if you carry a balance on the card.  All in all, a secured credit card is a great way to build your credit if you’re just starting out.

Another effective way to build a credit history is to become an authorized user on someone else’s credit card.  Often, a parent or guardian will designate one or more of their young adult children as authorized users on a credit card.  This helps the child build credit without obligating them to pay the balance every month.  Just keep in mind that if the person whose account you are authorized to use does not handle the account properly, their mistakes could end up hurting rather than helping your credit.

Typically, establishing credit only takes a few months, then you’ll be ready to select for your first unsecured credit card.  But, before you sign up for the first ad you see, make sure that you do your research so that you choose the right card for your needs.  As yourself these questions:

How will you use the credit card?  Emergencies only?  Day to day purchases so that you can cash in on rewards?   Will you pay in full every month or will you carry a balance?

If you plan to carry a balance on the credit card, what’s the interest rate that you’ll pay on the balance each month?  The interest rate used by credit card companies is the annual percentage rate, or APR. There are cards with variable APRs, which are based on a certain index (such as the U.S. prime rate).  There are also nonvariable APRs, which are usually fixed-rate credit cards. As a beginner, you will usually want a low-rate, nonvariable APR credit card, because knowing your interest rate will give you a sense of how much money you will need each month to pay at least the minimum amount due. A low-rate, nonvariable APR card will therefore help when you create a monthly budget.

Will there be any penalties, fees, or other charges related to the credit card or it’s use?   Read the fine print – the most common fees include balance transfer fees, cash advance fees, fees for requesting a credit limit increase and online or mobile payment fees.  Most credit card companies impose penalties for not paying your bill on time or going over your credit limit.   Choosing the wrong credit card company can result in outrageous fees and penalties that could actually hurt your credit score in the long term.

What about rewards credit cards?  Many credit cards offer cash back for certain purchases, or 0 percent APR for the first six to 18 months, or other incentives.  The low interest cards are great if you’ll carry a balance, just as the cash back is excellent if you use that reward correctly, but make sure that the reward actually fits your spending pattern.  Knowing how to use these rewards can really save you a lot of money if you’re careful.  Just remember, that 1% cash back really isn’t  saving you money if you’re paying 24% interest on the balance you’re carrying every month… don’t fall into the credit card trap.  Use your cards sparingly and pay off the balance as quickly as possible.

Remember, you’re working to build good credit, and you don’t want to get off on the wrong foot!  Your payment history, the amount of credit you use, and the number of negative marks on your credit history all have a large impact on your overall credit score.   

Pay off your balance as soon as you can, limit the percentage of overall credit that you’re using, and avoid any negative marks on your credit history if at all possible. While credit cards are a convenient part of everyday life, they can also be very dangerous if not used responsibly.  Make sure you use your first credit card to establish positive financial habits that will serve you well for a lifetime.