Your First Credit Card: What to Know
Your first credit card is a financial rite of passage. When you turn 18, you’re finally eligible to apply without a cosigner. Before you get excited, remember: a credit card is not free money! You’ll need to pay off the balance regularly in order to not incur interest charges. Credit is a powerful tool, but it comes with lots of responsibility. Here’s what you need to know before wielding any plastic.
What You’ll Need
It’s not quite as easy as just filling out a form on your 18th birthday. You’ll need to show proof of a steady income, so the credit card company will know that you’re capable of paying off your balance. Even so, it may be difficult to get approved. You may need your parents to cosign. If you can’t pay, they will have to. If that’s ever the case though, you can probably expect your parents to cancel the card.
It’s not a bad idea to start out with a “secured” credit card. For this type of card, you’ll deposit money into an account, against which your balance is “secured.” You’re not spending that money - it just rests in the account in case you don’t pay back what you owe. If your payments are always on time, you’ll get it back whenever you close the card. Secured cards are easier to get than regular cards if you have no credit history. The other benefit to a secured card is that the APR may be lower than the unsecured cards you qualify for.
What’s an APR?
An Annual Percentage Rate is the rate of interest charged on your account. Generally, you have a grace period of 21 to 25 days to pay off your balance. If you don’t pay it off in full, interest will begin to compound on your account. Most cards compound daily.
For example, suppose your card charges 19%. You have a balance of $150 that you don’t pay off. Divide your APR by 365 (the number of days in the year) for a daily rate of .052%, which amount to about 8¢ per day. Thus, the next day, your balance would be $150.08.
Ignore Offers in the Mail
The day you turn 18, you can expect to receive credit card offers in the mail all the time. Chances are, these aren’t the best offers available to you. Usually they feature an APR a couple percentage points higher than you could find elsewhere or are saddled with ridiculous annual fees. The banks that send these offers are betting that you’ll find them convenient and apply, instead of doing some research for a lower rate.
Building Credit
A good credit score is important for many things in life, like buying a house, starting a business and even getting a low rate on car insurance. In fact, some employers check their applicant’s credit scores before making a hiring decision! A credit card is a great way to build up your credit score. By keeping a credit card open, using it regularly and always paying it off in full, you’ll strengthen two important parts of your credit score: Revolving credit utilization and credit history.
Credit history is easy enough to understand. The longer your credit history (without any blemishes), the more creditworthy you are. Revolving credit utilization is a measure of how much of your available credit you use - the lower it is, the better. For example, if you have a limit of $600 and you carry a $200 balance, your credit utilization is 1/3 or 33.33%.
You may wonder, “If I get a better credit score by not utilizing my credit, why would I bother with a credit card?” The answer is that you’ll be building a history and demonstrating your trustworthiness. It’s hard to say when, but sometime in the future, you’ll be very glad you did!
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