Published February 6, 2017|7 min read
In a world where financial foundation is built solidly on credit, having a credit card in your arsenal can benefit your life in so many ways, from qualifying you for a car loan, a mortgage, renting an apartment, or getting a future line of credit.
Applying for a credit card is a pretty simple, seamless process, too; you just apply, get approved, receive your card in the mail, and start using the card.
Long-time cardholders with an established credit history may be able to speed through this process quickly, but if you’re new to the credit game, going straight out to apply for your first credit card could lead you into dangerous territory. Their ease of application could mean not taking into consideration how a credit card should fit within your finances, risking debt and an assortment of other problems.
As you look for your first credit card, take some things into consideration and be aware of the ins and outs of applying for one.
Applying for your first credit card and then using it without knowing what some important card terms are first is a lot like buying some new gadget and trying to figure out how it works by pushing all the buttons instead of reading the instruction manual. Here’s a mini glossary:
Annual fee: A yearly flat fee some card issuers may charge you for using your card.
APR: Annual Percentage Rate. The interest rate charged to your balance if you don’t pay in full by your due date.
Cash back: A type of credit card reward issuing users cash back when fulfilling certain purchase terms (like spending a minimum amount of money).
Credit limit: The maximum amount of credit on your card available to you.
Credit report: A document compiled by three credit bureaus detailing your entire credit history. It’s used by card companies in making credit decisions when you apply for a card.
redit score: A 3-digit number representing your credit health that tells lenders if you’ll be able to pay your bills on time, in full. (Also known as a FICO score).
Interest rate: The APR attached to your account; it can be fixed, which won’t change, or variable, which may fluctuate according to current market rates.
Introductory interest rate: A low or zero percent APR often offered by card companies to attract new users to sign up. The rate will increase after a specified amount of time.
Minimum payment: The lowest amount card holders are expected to pay on their balance each month before penalty interest charges kick in.
Principal: A total credit card balance before interest rates are applied.
Secured credit card: A credit card whose credit limit is guaranteed by a card holder’s own cash deposit, as opposed to credit granted by the card provider.
Remember that a credit card isn’t a debit card. Unlike the latter, where transactions are deducted from your checking account, money spent on a credit card is not your money, nor is it free money -- it’s money borrowed from your card issuer that needs to be paid back. This means you’ll need a great deal of discipline to pay back your balance every month, or you could risk going into debt. But don’t let this deter you from pursuing a credit account.
Credit cards also come with greater consumer protections than those of debit cards. If a transaction is disputed on your credit card, you won’t need to pay until the problem’s been resolved. On a debit card, the money is gone from your account and it may be difficult to get it refunded.If your first goal is to spend to your heart’s delight and worry about paying it back later (if at all), it might be time to rethink what you want out of a credit card. Creating and maintaining a credit history may be your number one priority. Avid travelers may want a card that offers points or airline miles. Cash back rewards or signup bonuses might be a big draw for you.
Young and first-time borrowers can learn a great deal of financial responsibility from having and using a credit card, but you invariably face a catch-22: You need credit to build credit, but if you have no credit, you can’t get credit.
Secured credit cards are designed for this reason. These basic, no-frills credit cards give you the chance to build your credit even if your credit history or score are minimal. With a secured credit card, your credit limit is a cash deposit you’ll be required to make before opening your account, so you’re essentially borrowing against yourself. Your deposit also acts as collateral for your lender in the event you abandon your balance and fail to pay it off. (The credit limit on an unsecured card, on the other hand, is granted by the lender.)
There are many secured credit cards on the market to choose from. My first credit card was the CapitalOne Secured MasterCard, which I used to build credit from scratch. When I was later approved for an impressively low APR on an auto loan, I attributed it -- and my excellent credit score -- to using that card.
If credit isn’t something you feel disciplined enough to carry, examine some of your other options first before doing anything else.
Consider getting a cosigner for your credit card application. Ask a parent, relative or trusted friend if they’ll endorse their name on your credit application. Though the card will be in your name, your cosigner’s credit is what counts towards getting approved. Keep in mind that if you can’t make your payments, your cosigner is on the hook for them, so discuss the arrangement before entering into any agreements.
Take out a personal loan. Unsecured (no collateral required) personal loans or credit builder loans are a chance to create and build credit without the use of a credit card or other credit account at your disposal. Be mindful that interest rates on personal loans can be high (up to 30 percent in some cases!), so borrow in amounts you can readily afford to pay back. Borrowing more won’t help your credit score and qualify you for a credit card, but borrowing minimally and paying your balance back on time does count.
Report your rent. If you’re an apartment tenant, your rent doesn’t generally count toward your credit score. But you can have it listed on your credit report and use it towards building better credit to eventually qualify you for a credit card if your current credit isn’t up to snuff. Various rental reporting agencies, like Rental Kharma or RentTrack, will even arrange payment between you and your landlord/property manager in addition to reporting the transaction to the credit bureaus. As of 2014, all three bureaus -- TransUnion, Experian and Equifax -- recognize rental payment history on credit reports.
Having a good credit history is important if you ever want to borrow money to buy a house, a car, or take out a loan or obtain more credit. Lenders need to see that you can be trusted to borrow and repay their money, and the way to determine that is to prove it to them. Using a credit card responsibly -- spending modestly, paying back your balance in full, on time -- is one of the first ways anyone can establish a positive credit history and leave a good impression on future creditors.
Yet you’ll want to know what your credit standing is before applying for a credit card, since you need credit to obtain credit. Confirming your credit score (a 3-digit representation of your credit health) and getting a copy of your credit report from AnnualCreditReport.com are your first steps.
Why? Your credit report will document your entire borrowing and repayment history, used by credit card providers to determine if you’ll make a creditworthy borrower. You’ll want to check your report for any outstanding debt in your name or erroneous items that could see your credit application denied. You’re entitled to one free copy of your credit report every year.Your credit (or FICO) score may range from excellent to bad:
Bad: Below 600
There are different opinions on what constitutes a good credit score. Rewards credit card carriers usually require a good-to-excellent score between 700 to 850, so applicants with poor or no credit may want to reconsider applying until they’ve built up their score a bit.
Before applying, read each card’s terms and conditions. Each credit card company will have its own set of rules, sometimes from card to card within the same issuer, and it’s helpful to know what you’ll be responsible for if you get approved.
Some things to look for are what your fees and interest rates will be. What’s the minimum monthly payment, and the penalty charge for late payments? What does the rewards structure (if applicable) look like? Are there any introductory offers, like a temporary interest-free period? Knowing the details can help you know what your responsibilities as a cardholder will be.Terms and disclaimers should be found on an individual card’s web page, but don’t hesitate to call the provider’s customer help line if you need clarification from a card representative.
Make sure to include all details in your application, like personal information (your name, address, Social Security number), employment details and other financial information.
You’ll need to include your total income on your application, since the card provider will need to verify your debt-to-income ratio. By comparing the amount of debt you owe with the amount of money you earn, the card provider will be able to determine if you’ll be able to make your payments. Include any income from side jobs you might have; every bit counts to improving your chances for being approved.
Applying for that credit card shouldn’t be a numbers game. Sure, you could send out 20 or 30 applications for various cards and see which ones stick, but that could harm your credit in a significant way.Every credit card application you make triggers a hard credit inquiry, sometimes called a hard "pull" of your credit, and may cause your credit score to drop. The amount of points may vary from person to person, but a credit application -- or multiple applications -- can indicate that you’re a greater risk to lenders, reflected in losing a few points from your FICO score.
One or two credit account applications won’t do much damage, but if you’re sending out applications en masse, the number of credit checks won’t be worth the rejections you might potentially receive if your credit is low to begin with. Too many applications also tell the credit bureaus who oversee your credit report that you’re an at-risk borrower desperate for funding.Narrowing down your credit card options to just two or three tops is a practical move that anyone -- not just new card applicants -- should follow to protect their credit score.
Once you’ve been approved for a new card (or cards), you’ll want to balance your credit usage. It’s commonly suggested never to exceed more than 30 percent of your credit limit; by "utilizing" only a smaller portion of your credit, you maintain a good credit utilization ratio, the amount of credit you use compared to the amount available to you. Likewise, if you have more than one credit card, use them judiciously; never use one exclusively and neglect another, or your credit utilization ratio could get skewed.Getting a credit card starts with taking the right steps before applying.
Give yourself some credit that you’ve done your research, figured out your facts, and found the right credit card that’s best for you and your financial health.
Image: Andrew Neel
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