So you’re thinking of getting your first credit card, but you’re feeling a little intimidated. No worries! We have you covered. It’s much more painless than you think. You can’t accomplish big financial goals without getting your first credit card.
This is because you have to show the financial world that you can manage your money. They will even score you through what’s called a credit score. Let’s examine the ins and outs of establishing your first credit card.
What is Credit?
Credit is a word that often gets stigmatized. But don’t let credit cards scare you. It is an essential tool in your financial arsenal. Credit (as it relates to credit cards) is the ability to make purchases on a short-term loan with the swipe of a card. You can choose to pay it off instantly or pay the debt later with interest.
When you receive a credit card, there is an agreement between you and the credit card company. They are giving you a set amount of money (a credit limit), and you agree to pay back this money in a timely fashion with interest.
Typically a credit card will assign you a credit limit based on your financial past. This is the amount that you can charge to a credit card.
Benefits of Credit
Credit can help you accomplish a lot. In our increasingly cashless world, it is essential to have access to a credit card. Many credit card companies make online payments effortless and have excellent protection from theft and fraud. So do your homework on different features. They are not all built the same. (Some can even give you rewards like cash and airline miles.)
Not only can it allow you to purchase something you want or need, but credit can also establish a financial history for you. This is called a credit history.
Credit history is essential for establishing a credit score. Credit scores are the first thing that other financial institutions look at when they loan larger sums of money. This includes renting apartments, buying homes, and purchasing a card.
So even something as small as a credit card has a significant impact in establishing a financial reputation for you in the future.
How do credit cards work?
Credit cards make purchases and pay bills. Whenever you use a credit card, your information is sent to the receiver’s bank. Your purchase is processed, and it is either approved or declined.
When this process is approved, your card’s credit is reduced until you pay it off. You should receive a credit card statement that explains what you owe, and this also includes interest and fees.
There is a grace period with credit cards before interest gets charged. So theoretically, you can earn rewards and up your credit score by being diligent with paying off your credit card bill before it is due.
Credit Limits
Credit is not unlimited in the world of credit cards. In fact, credit limits are established on each card based on numerous factors. Credit limits are done through a process called underwriting. The underwriting process determines if you qualify for the card, what rate you should pay, and how much you can spend on credit.
Credit limits are the maximum amount of credit that a credit card user receives. This number can increase or decrease over time based on how well you can pay your credit card bills.
Your credit history is assessed to determine your credit limit. So card companies will look at things like student loans, mortgages, car loans, work history, bankruptcies, and even the amount of times your credit history was accessed.
Fees & APR
Is all of the terminology surrounding credit cards confusing to you? The language usually covers fees and APR. You must know how to look at these factors when comparing different credit cards.
Credit Card Balance
The Credit Card Balance is the amount that you owe. This can include all the transactions you have made but still owe money on, interest, and fees. Your credit card balance usually has a minimum attached to it, and this means you have to pay a certain amount to stay in good standing with the credit card company.
Credit Card Interest Rates (APR)
Annual Percentage Rates, or APR for short, is used for collecting interest. Each credit card has a yearly rate that gets divided monthly into your credit card balance. For example, if your APR is 18%, you can expect to pay 1.5% in interest each month.
Fees
Numerous fees can pop up on a credit card statement. Don’t be surprised. Be sure to read the fine print. These fees can really add up on top of what you are already paying each month on a credit card bill. Many of these fees can also affect your credit score.
Here are some standard fees associated with credit cards:
- Late fees
- Over-limit fees
- Annual fees
- Cash advance fees
- Returned payment fees
How to Apply for a Credit Card
The first step in applying for your first credit card is to know where you stand. You should have access to a free annual credit report. Know your credit score so you have a good idea of which credit cards will accept you.
Now that you have an idea of what you can qualify for, consider all of the credit cards’ features. Are you looking for incentives like airline miles? Do you plan to pay it off each month? If so, the interest rates might not be the most significant factor for you. There are numerous pros and cons to weigh before taking the plunge.
Once you have narrowed it down, it is time to apply for the card. It’s essential not to apply to too many credit cards because this can lower your credit score.
Once your application is accepted, sit back and wait for your new plastic to get mailed to you. And with good financial habits, your new credit card will prove to be an asset rather than a liability.
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