Editorial Policy

What to Look for in Your First Credit Card

Erica Sandberg

December 21, 2012

QDear Erica,

I am trying to find a new way to earn credit now that my car is paid off. I am new as this credit thing. I know I want a card with low interest and that is about as much as I know about credit cards. Which card do you think I should consider? I don’t understand APR and I would like some cash-back rewards if possible. — Brandi

AHi Brandi,

How would you react if I said that you could get a credit card with an interest rate in the triple digits or higher, yet you wouldn’t have to pay a penny in finance charges? Kind of shocked, right? The truth is, even if you charge thousands of dollars to the card, if you pay the bill in full every month, the rate itself is irrelevant.Ask Erica

Now I’m not implying that you should actively pursue a card with a very high annual percentage rate (APR). Not at all! Just that it’s more important to only charge the amount that you can and will repay when the bill comes due.

In fact, the only way a low APR card would be advantageous is if you were to make only partial payments and roll remaining balances over to the next month. Whatever that amount is, interest will be added to it. The higher your rate, the more expensive that action becomes. However, the real test is in how long it takes you to get the debt down. To illustrate:

Let’s assume you charged $2,000 on a credit card that has an 11 percent interest rate.

  • Send the full amount, and the total cost is what you spent: $2,000.
  • Pay over three months, with payments of $679, and the total cost is $2,037.
  • Pay over 18 months, with payments of $122, and the total cost is $2,179.

So what would the cost be if the card had an APR of 28 percent? Well…

  • Again, send the full amount and the total cost is what you spent: $2,000.
  • Pay over three months, with payments of $699, and the total cost is $2,095.
  • Pay over 18 months, with payments of $138, and the total cost is $2,473.

As you can plainly see, it’s not so much the APR that makes the difference, but how long you wait to satisfy the whole bill.

Now that the math is out in the open, it’s time to focus on getting you a great credit card — one that offers a cash-back rewards program. With each purchase you make, you’ll build points transferable for money in your pocket. If you use the card right by paying off your balances every month, you can add another bullet point to the scenarios above: Charge $2,000 but earn a few bucks.

Your first step toward getting that cool card is to access your free credit reports from AnnualCreditReport.com, and to purchase your FICO score from myFICO (about $20). You’ll want to apply for the best account that you qualify for, and you can’t do that without knowing where you stand. Check your reports for errors and fix any that you may see by disputing them with the credit bureau, as they’re bringing your scores down. Hopefully, you’ve made all of your car payments on time, as that will be a big factor in your rating.

As for your FICO score, numbers in the mid-700s are considered excellent. If they’re there and you have a nice, steady income, you’ll probably be eligible for a good cash-back card now. If they are not quite there yet, apply for a card that is right for you and use it well by borrowing a little each month and repaying it in full. It won’t be long before you become an attractive rewards card candidate.

Got a question for Erica? Send her an email.