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How to Start Your Credit Journey

Erica Sandberg

June 7, 2013

QDear Erica,

Sorry, stupid question, but which is easier to get: a credit card or loan? I don't have either and want to get started with credit, but I don't know the difference. I've worked only with cash. Which should I get first? And how? Yes I feel stupid, so please don't use my real name. — John

AHi John,

I can understand why you'd want to write under a pseudonym. After all, everyone else was born knowing about the world of banking.

Ridiculous! This is not innate knowledge, embedded into human DNA. Borrowing wisely is a learned skill. Here's a primer on how credit cards and loans work.Ask Erica

Credit cards

Credit cards allow you to borrow up to a predetermined amount set by the issuer, called the credit limit. After you charge something, the issuer sends a bill, asking for at least a partial payment. As long as you send that amount by the due date, the issuer will be satisfied. However, interest will be added to any balance you have remaining. Such finance charges can increase the price of a purchase dramatically because interest compounds. That means you pay interest on a debt to which interest has already been applied. The lower your annual percentage rate (APR), the less you'll pay, but the fees can still add up quickly.

There are also charge cards, which are a little different. You can make purchases with them, but you're required to pay the whole sum by the billing date — usually in about 30 days. No interest is added (because you're not allowed to carry a balance), but the annual fee to have the card can be high.

Credit cards may be unsecured or secured. To qualify for an unsecured account, you'll usually have to prove that you've been a responsible and capable customer in the past. To learn that, the issuer would check your credit rating, looking for a long and positive credit history. It would also analyze your stated income to ensure you have enough money to cover the amount you borrow. If you don't pay, the credit card company may sue you for the delinquent debt. Secured cards, on the other hand, are collateralized with a cash deposit. They are easier to get than their unsecured cousins because the issuer can just take the money you've set aside if you don't pay.

Credit cards are ideal for items that you can afford to repay quickly. Sending the entire balance is best, but spacing the debt out over a few months can be OK too — as long as you're prepared to pay extra for the privilege. Because you're just beginning, focus on cards for people with limited or no credit history.


With a loan, you borrow a specific amount of money and then repay it in equal installments over a fixed number of months or years.

There are many kinds of loans. Some are secured by the property you buy, like a home or vehicle, and the asset acts as collateral. If you don't pay as agreed, the lender may repossess the property.

Others loans are unsecured. For example, you can get a personal loan from a bank or credit union and can use the cash for anything. To qualify for an unsecured loan, you usually must have an excellent credit rating.

Loans are best for financing something specific, such as an education, a business venture or real estate. So where would you get one? Try a bank, credit union or other reputable finance company. Interest on loans does not compound, but you will pay a set amount of interest with each payment. As with credit cards, the lower the rate, the better.

So what's the easiest way for you to start? I believe the best way is a secured credit card with a low credit limit. Once you get it and charge responsibly for a year or so, your credit report and the scores that are derived from them will probably look good enough for you to qualify for other products — from unsecured cards to loans.

Now aren't you glad you asked?

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