How to Choose Your First Credit Card?
Finding the best credit card is part art, part science...
Choosing the right credit card for your needs might be difficult. Today, there are numerous banks and credit institutions giving a wide range of possibilities, making it difficult to choose which provides the best credit card for your specific situation. Furthermore, the terms and conditions for many of these financial instruments are complex and difficult to grasp, leaving many consumers trapped in a sea of fine print.
When shopping for a credit card, it is important to concentrate on a few key aspects. To help, Renee Marinez, resident financial planner, offers sound advice on what a consumer should be sure to look at before signing up for a credit card.
If you know the basics, you can save 1) time, 2) money 3) stress and 4) start building good credit.
Getting a credit card for the first time is a big step in your life. You might already know how credit cards work and how to use them in a responsible way, but what really matters are the details. We recommend that you learn as much as you can about credit cards before selecting one. Let's jump right in!
Quick recap on how a credit card works:
A credit card differs from a debit card in that, when you use it to make purchases, you are essentially borrowing money from the credit card company. If all purchases are repaid on the monthly due date or (before), then there is nothing to worry about. However, the credit card company does not require immediate repayment of the entire balance. Just a monthly minimum payment. And if you do not pay it off in full, you will "carry a balance" and be charged high (expensive) interest.
In a perfect world, your credit card experience would go as follows:
1. Each transaction that you charge to your card increases your outstanding balance.
2. At the end of your monthly billing cycle, your unpaid balance becomes the "statement balance" for that month.
3. You pay off the *full balance* on your statement before the due date they give you.
However, if you're going to pay off the whole balance, you have to make sure you don't charge more than you can pay (your income minus all the other things you're paying for). Therefore, you must be careful not to overspend.
Pros and cons of credit cards:
First, the pros:
- Credit: Using a credit card is one of the most convenient ways to build credit, which is essential for things such as apartment leases and loans. (Although this is not the only option. Other forms of credit, such as auto or school loans, can be helpful, as can timely bill payments.
- Rewards: Currently, credit cards are more likely than debit cards to offer cash back or reward points on transactions; however, this is changing rapidly.
- Extra protections: Both credit and debit cards typically offer $0 liability for fraudulent charges, meaning you are not responsible for costs if your card is stolen and used fraudulently. However, when you use a credit card to make a purchase, you are more likely to receive additional perks, such as travel insurance or price protection (although perks are not unheard of with debit cards).
- Emergencies: In the event of a true financial emergency, the immediate spending ability provided by a credit card can be extremely useful.
And the cons:
- Approval: It might be difficult to qualify for a credit card, especially if you are new to the world of credit.
- Logistics: Since you are not spending your own money (yet), you must exercise extreme caution to avoid overspending. Which requires a bit more mental arithmetic to keep track of how much is in your bank account, how much you've previously spent on the card, and how much you have remaining.
- Temptation: It's easy to convince yourself that it's acceptable to overspend this one time on this one item because the price is so high and you'll pay it all back next month. We've all been there, but credit card debt is a slippery slope. In addition, your credit card benefits will not be sufficient to offset this interest.
- Credit Score: If you hold a big balance or miss payments, it might negatively impact your credit score.
- Interest: Nearly 18% is the average interest rate on credit cards (and most credit cards have variable interest rates, meaning the card issuer might keep changing it on you). If you carry an amount for more than one month, you will be charged interest on your interest, which makes it much more difficult to get out of debt once you're in it.
- Fees: They are higher. While the average annual fee for a checking account is $67.32, the average annual fee for a credit card is $178.
Let us say you have a debit card, and now you are looking to get your first credit card:
Here’s what you need to know:
1. Understand Your Fees
Fees are what keep the financial industry going, so if you want to "win" with credit cards and banks, you need to know how your fees work and how to get them waived. People get caught up in the 2% cashback, but they will end up paying a lot more in finance charges, annual fees, ATM fees, foreign transaction fees, and all the other ways the bank makes money off of you.
2. Consider the Long-Term
Consider the card's long-term advantages in addition to the sign-up bonus and first-year bonuses. Yes, a 0% APR and a $500 cash bonus are fantastic, but they should not be the reason you choose a particular bank or credit card. You can build credit by keeping accounts open for an extended period of time. Compare your spending patterns and needs to the ongoing benefits that are provided.
3. Evaluate Your Credit Score And Specific Needs
There are parallels between selecting banks and credit cards. Ensure that you make the appropriate decision depending on your credit score, specific needs, safety, and any other objectives or constraints. If you can achieve a balance between these factors, you will be able to choose the best credit card plan and bank for you.
4. Select According To Your Spending Habits
Choose the credit card that best suits your spending habits. For instance, you can use the Amex Platinum since it offers up to five times more points when you travel, allowing you to earn a free flight much more quickly. In addition, it offers excellent lounge privileges and Uber incentives, which you can utilize. Choose your credit cards based on your spending and lifestyle preferences.
5. Review the Benefits
Consider the rewards program and the fee of the card to ensure that you are receiving the best value for your money. What's the sense of accumulating a large number of airline miles if you hate flying?
6. Determine the Monetary Value of the Benefits
If you're looking for a rewards card, find out how much the benefits are really worth. There are numerous websites that can help you in determining the true value of each "point" or "mile." Once you have this information, you can compare the monetary value of the card's features to the annual fee, interest rate, and comparable card offers.
7. Seek Reduced Interest Rates
It is easy to be swayed by "introductory" interest rates and other incentives that make establishing a credit card attractive. Despite the fact that this rate may appear to be exceptional, it will increase after the introductory period. The key to picking a decent credit card is to look for cards with low long-term interest rates.
8. Select A Local Service
Selecting the proper bank is essential to your success. Because "life occurs" to everyone, you need to develop a relationship with your bank. This is particularly true for owners of small businesses. Sometimes, you may need to make a choice that calls for the advice of a banker who knows you instead of someone you've never met.
9. Evaluate the offered non-points benefits
Do not overlook non-points benefits like insurance, extended warranties, and lounge access (if you travel). For example, if you want to hire a car, the Capital One card is a smart option. You can avoid paying the high collision insurance premiums that rental companies charge.
10. Consider Apps That Can Be Useful
Experian and a few others offer mobile applications that provide credit-based suggestions. Apps are available for comparing features like annual fees, introductory rates, annual percentage rates, etc. Not all persons and cards are created equal, so utilize Experian or other companies with helpful tools.
Note: Beginners Do Not Need the Best Credit Cards!
If you are new to credit, you probably would not be able to get the best credit cards, the ones with the most rewards and perks, the biggest sign-up bonuses, and the longest periods with no interest. Only individuals with good or excellent credit (scores of 690 or higher) and longer credit histories who meet certain income requirements can get these best-of-the-best products.
If this is your first credit card, you may have to start small with a card made for those with little or no credit history. Many of these cards offer good rewards and do not have annual fees. Some options to think about are:
1. Credit cards for students, or one made for college students.
2. A secured credit card, or one that needs a cash deposit.
3. A credit card for people with fair credit, which is usually between 630 and 690 on a credit score scale.
It is Easier to Get a Credit Card if You Put Down a Deposit
If you have no credit history and are having trouble getting approved for your first credit card, try a secured credit card.
People with bad credit or no credit at all can use these types of cards. You will need to put down a cash deposit before you can open your account. Most of the time, your credit limit is the same as your deposit. Depending on the card, you have to put down anywhere from $200 to $500. Most secured credit cards let you deposit more money to get a higher credit limit.
If you do not pay on time, you could lose this deposit. But if you always pay on time and do not spend much more than your card's limit, you could have good credit in a few months!
At that point, your card issuer might change the account to a regular unsecured card, or you could apply for an unsecured card and close the secured card in good standing. In either case, you would get your deposit back.
Getting Your First Credit Card Can Help or Hurt Your Credit…
As previously mentioned, one of the main reasons to get your first credit card is to build your credit. But if you are not careful, it can have the opposite of what you want. What you do makes all the difference.
Every month, your credit card issuer will send a report to credit bureaus about how you use your card. Credit bureaus are the companies that put together your credit reports, which are used to calculate your credit score. The information that is sent to the credit bureaus includes whether or not you have paid your bills on time and how much of your available credit you have used. Late payments are not good for your credit score. It is bad to use the card up to its limit.
Pay your credit card bill in full and on time every month and stay well below your credit limit to get the most out of it. (As a general rule, your balance should always be less than 30% of your available credit.) You can also keep an eye on your credit score to see how you are doing.
Important: Check the Rates and Fees First
Before you apply for a credit card, the issuer must tell the public about certain terms, such as interest rates and fees. These are shown in a table called a "Schumer box," which is usually on the application page for a credit card online (look for a link that says "Rates and fees" or "Pricing and terms" or something similar) or on a slip that comes with a paper application. The Schumer box includes the card’s:
- Annual fee is what cardholders have to pay each year.
- Annual percentage rates, or APR. This is the interest rate you will pay if you carry a balance from one month to the next. Some cards have different interest rates for purchases, balance transfers (when debt from another account is moved to the card), and cash advances (cash withdrawn with the card, usually at an ATM). Some cards, but not a lot of them, also have penalty APRs that are charged when a payment is late.
- Foreign transaction fees, or fees that are charged when you buy something outside of the U.S., are usually 3% of the amount you are buying.
- If you pay even one day late or do not pay at least the minimum amount due, you have to pay late fees.
There are some things you would not know until after you have applied. For example, most of the time, you would not know what your credit card limit is until your application is approved.
Credit Card Fees Are Preventable
Even if you are new to credit, it is possible to avoid all credit card fees. Many secured cards and a lot of other good starter cards do not have annual fees. If you pay on time, you would not have to worry about late fees.
Foreign transaction fees are not important if you do not plan to use your card outside the U.S., and some card issuers do not charge them anyway.
If you never do balance transfers or cash advances, you do not have to worry about the fees that come with them.
Over-limit fees, which you have to pay if you go over your credit limit, are almost gone. Issuers cannot charge them unless you sign up for over-limit protection, which is when the issuer pays for charges that go over your limit. Even then, you can avoid them by not going over your limit.
You Can Also Avoid Paying Interest
Speaking of costs you can avoid, you do not have to pay any interest on your credit card bill if you pay it off in full every month, no matter how high your APR is. That is because of the grace period on your card. Simply put, after you pay your bill in full, interest would not start to add up on new purchases until the next due date. If you pay the next month's bill in full, you would not have to pay interest again, as long as you only use your card to buy things. If you keep doing this, you will never have to pay interest.
But if you do not pay your bill in full—that is, if you "carry over" some of your balance to the next month—you will not only have to pay interest on the amount you "carried over," but you will also have to pay interest right away on any new purchases.
Can You Pay More Than the Minimum? Then You Should!
Your minimum payment due, or the least amount you need to pay to keep your account in good standing, is shown in a big way on your credit card statement. That is not always clear. You can pay the full amount, but you could also get away with paying a much smaller amount.
In reality, most of the time, paying less now means paying a lot more later. Usually, the minimum covers the last month's interest and fees (if there were any) but only a small amount of the balance. So, if you only pay the minimum, you are not doing much to reduce your credit card debt. You are getting nowhere. If you continue to use the card to buy things, the balance could get out of hand.
It Costs a Lot to Pay Late
Missing your due date can get expensive quickly. Depending on how late you are with your payment, you could pay late fees. The law changes the limits on these fees every year. But most of the time, the first time costs more than $20, and each time after that can be close to $40.
Most credit cards do not have penalty APRs anymore, but a few still do. When you pay late, a penalty APR kicks in and can immediately raise your interest rate to 30% or more for new transactions. If you are more than 60 days late with your payment, that penalty APR can also be added to your remaining balance.
Your credit would not be hurt if you pay a day late. But if you pay 30 days late or more, it will show up on your credit report as late, which will hurt your credit score.
Think about having payments taken out of your bank account automatically. Or, if you are worried about going overdrawn, write down when things are due on a calendar.
Your Credit Score Can Go Down if You Get too Close to Your Limit
Your credit utilization ratio is how much of the credit you have that you use. This is a big part of what your credit score is based on. When your utilization ratio gets too high, like if you have a $1,500 balance on a card with a $2,000 limit, it can hurt your credit score.
The better your situation is, the less you use your credit. Try to use less than 30% of your limit at all times to keep your score in good shape. So, when the issuer reports the status of your account to the credit bureaus, you can be sure that your balance would not be too close to your limit.
Combating Credit Card Fraud Is Not As Challenging As It Seems!
Understand that credit cards really offer you more security against fraud than debit cards do if you have been hesitant to apply for your first credit card due to a fear of fraud.
Your bank account could be instantly emptied if thieves get hold of your debit card information. You can notify your bank about the fraud and get your money back, but it will take some time to resolve, and during that time you might run out of money.
However, if someone uses your credit card details fraudulently:
- It is not your money at risk, it is the money of the credit card corporation. You will have plenty of time to contest any erroneous charges and get them taken off your unpaid balance, usually immediately.
- There is no cost to you. Federal law limits your liability for fraudulent credit card purchases, and credit card networks like Visa and Mastercard typically have zero-liability policies that reduce your liability to $0.
- It is not too difficult to obtain a replacement card. Your card will be canceled and a new one with a new number will be sent to you when you phone your issuer to report fraud on your account. No one will be able to use your old card number to make purchases.
Rejected for a Credit Card?
Being turned down for a credit card is disappointing, but you can benefit from it if you ask the issuer to explain why. Federal law requires card issuers to send you an adverse action notice, which is a justification for their choice. An issuer might claim, for instance, that you were declined because of your insufficient income or lack of credit history. You may use this criticism to guide your decision on how to increase your chances of being accepted in the future.
Once you know the ins and outs, you can save time, money, and stress and begin creating good credit.
Let us know in the comments, if you would like us to review some of the best beginner cards.
I hope this information was helpful. If you have any questions feel free to reach out. I’d be happy to chat with you.
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