5 Things to Know if You're Applying for Your First Credit Card
- Applying for your first credit card is a major financial milestone.
- Your credit score could be affected by your borrowing behavior.
- You could also earn valuable rewards and take advantage of great cardholder perks.
Don't apply for your first credit card without reading this.
Applying for your first credit card is a major milestone. Your card could potentially help you build good credit and earn valuable rewards that enable your everyday spending to pay off. But in order to make sure you end up with the right card -- and use it in the most responsible way -- there are five key things you should know.
1. Credit card interest rates can be very high
One of the first and most important things to realize when applying for your first credit card is that the interest rates on this type of debt can be extremely high. It's not uncommon for a card to have an interest rate of 17% or higher, especially if you're getting a card geared toward first-time borrowers who may not have a solid credit history.
When a credit card has a high interest rate, carrying a balance can be costly. You'll ideally want to avoid charging more on your card than you can pay off in full when you receive your statement. If you can pay your card off, then you'll avoid these expensive interest charges and reap the benefits a card offers without getting stuck in debt that can affect your financial future.
2. A single late payment can hurt your credit score
After you've been approved for your first credit card, you'll want to be certain you make at least the minimum payment on time, every time. Your card issuer will report your payment record to the three major credit reporting agencies. If you're late with a payment, this can cause your credit score to fall dramatically -- especially if you have just one card on your credit record and don't have a solid track record of responsible borrowing.
Since your credit score is used by businesses -- including landlords -- to determine if you'll be a reliable customer, you don't want to take a chance of reducing your score. To make sure you don't inadvertently miss a payment, consider setting up autopay so the money is sent directly to your creditors on time.
3. Credit card rewards can be valuable
Although it can be a challenge to get your first credit card if you don't already have a solid credit history, you'll hopefully have some good card options that offer rewards. Many cards -- even some geared toward first-time borrowers -- offer cash back, points, or miles. If you're able to earn rewards for spending you'd have to do anyways, this can be a major financial perk.
To make the most of your credit card, try to find a card that offers bonus rewards for the spending you do most often. So if you travel frequently, for example, see if you can apply for a first card that gives you extra points for booking plane tickets, hotels, or rental cars.
4. Maintaining a low credit utilization ratio is key to improving your credit
If you want to ensure your new credit card helps you build credit, you need to understand how credit utilization ratios work. Lenders consider your credit utilization ratio when setting your score, and a lower utilization ratio is better than a higher one.
So what is your credit utilization ratio? It refers to the amount of your credit line you use on your cards. If your card issuer gives you a $1,000 credit limit and you charge $500 on the card, you'd have a 50% utilization ratio. Anything above 30% can hurt your credit, so you'd want to try to avoid this.
5. Cards can come with fees, but they're sometimes worth paying
Finally, you should be aware that sometimes credit cards come with fees you'll owe beyond the interest rate.
Sometimes, these fees can be worth paying. For example, if you sign up for a travel card with a $99 annual fee but you get free checked bags and a $100 statement credit for in-flight purchases, the fee may be well worth paying due to these perks.
In other situations, though, the added costs your card issuer imposes may not be worth it. For example, if your card charges a foreign transaction fee and you travel abroad often, you could end up paying more for all your purchases while you're away.
By keeping these five factors in mind when applying for a card, you can pick a card that rewards your spending and doesn't impose unnecessary costs on you -- and can make sure you're using your card wisely so you help rather than hurt your credit score.
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