How to Choose and Use Your First Credit Card
By Eva Norlyk Smith Ph.D.
June 19, 2013
When credit card offers land in your mailbox, it's easy to get tempted, particularly if you don't already have that much-coveted piece of plastic (and even if you do).
However, just because a fancy-looking offer happens to come your way, it doesn't mean that it's the best deal for you. In fact, there are often reasons to be cautious.
“There are plenty of good credit cards out there,” says Joe Ridout, consumer services manager of Consumer Action, a nonprofit consumer advocacy organization. “But there are also companies that try to trick first-time applicants into signing up for rip-off offers. If you're not careful, you can end up paying several hundred dollars to get a credit card with a paltry credit limit.”
The good news is that with a little legwork, even people with no previous credit history can find a card with reasonable terms. These tips will help you sift through all the offers.
1. Think long-term commitment
It's easy to get swayed by credit cards that promise bonus sign-up offers, generous rewards earnings and other attractive bells and whistles. However, most cards with rewards bonuses also come with a $75 to $95 annual fee, or higher. The fee is easy to overlook, because it is often waived the first year. Plus, these cards are generally reserved for those with excellent credit, which is most often obtained by having a lengthy credit history — something you may not yet qualify for yet.
And since your credit history weighs heavy on your credit score, it's important to hold on to your first credit card for a long time. So, once the annual fee kicks in, that attractive-looking rewards credit card can become an expensive companion.
“Make sure to do your research so you wind up with a simple card free of annual fees,” Ridout says. “Although you could obtain a rewards card that would give you a percentage cash back, it's really important to first master the fundamentals. Once you've mastered the fundamentals, you can always get another one.”
2. Stick with cards from issuers you know
Annual fees are just one of the things to avoid when looking for a new credit card. While the Credit CARD Act of 2009 cleared up some of the worst credit card traps, there are still many credit cards with tricky terms. To be on the safe side, stick with cards issued by the largest credit card issuers, such as Chase, Citigroup, Capital One, Discover and American Express. Avoid credit cards issued by smaller, unknown banks, unless it is a local bank or credit union you are familiar with.
“Credit cards issued by credit unions are a good source of cards for most people,” Ridout says. “There are usually credit unions within a couple of miles from where people live, and most issue credit cards. They often have superior features and because it's local, they may give more close consideration to your application.”
3. Know your rates
Read up on the credit card terms, so you know the difference between the various annual percentage rates (APRs) your card charges and when they start applying. For example, the APR on purchases is typically lower than the APR on cash advances (when you use your credit card to take cash out at the bank or an ATM). While purchase APRs typically range from 12.99 percent to around 21.99 percent, cash advance APRs are generally much higher, at 23.99 to 24.99 percent.
For purchases, there is typically a grace period before interest charges kick in on your monthly card balance, meaning you can avoid paying interest as long as you pay the balance off in full each month. For cash advances, however, there is no grace period, so interest charges start accumulating from day one.
Another possible APR would be fore balance transfers (when you transfer the balance on one card to another). While you don't have a balance to transfer now, it's important to familiarize yourself with the rates and fees, so you have a full understanding of the terms, should you need to transfer a balance in the future.
4. Preapproved doesn't mean approved
When you get a credit card offer in the mail informing you that you've been preapproved for a credit card, it doesn't necessarily mean that your application will get accepted. Mailed credit card offers are prescreened, which means that they are sent to people who meet certain basic criteria, such as a minimum credit score. Each card issuer has different criteria for final acceptance, however, so not all people who apply will be accepted.
If you find that you have trouble getting approved for the credit cards you apply for, you may need to consider getting a secured credit card at first. With this type of card, you pay a fully refundable deposit to back up the initial credit line. After using a secured credit card and paying on time and in full each month, your credit score will likely increase enough to qualify for a regular bank credit card in as little as six to 12 months. Be sure to look for a secured card from a reputable card issuer with a low annual fee.
For example, the Capital One Secured card features a modest $29 annual fee and no set-up fees, making it one of the more attractive offerings for people needing a secured credit card. It's also what's known as a “hybrid” secured card, which means your credit limit will be higher than the deposit you put down.
5. Educate yourself on good credit management skills
Credit cards can offer convenience, easy access to credit when needed and, most importantly, a shot at earning an excellent credit score. However, if not used with care, credit cards can also be expensive and could negatively impact your financial future. No matter which card you choose, follow one simple rule, Ridout recommends.
“If you pay off your credit card in full each month, it's almost impossible to get into trouble,” Ridout says. “But any balance you can't pay is a warning sign. Once you start to use your card to buy things you don't have cash on hand for, that's when you start getting into trouble. Never use your card as a line of credit to extend your credit beyond what you can afford.”