Getting your first credit card is a huge step towards financial independence, but if you didn’t grow up in a household that talked openly about money and personal finance, you may not know how to pick a good first credit card… or even why you should get one in the first place.
But you’ll absolutely need a credit card in your adult life, for things like buying a plane ticket, renting a car, and, most importantly, building credit. Unfortunately, many of us don’t build credit while we’re in college because we aren’t paying the kinds of bills that contribute to our credit score, explains Emily Thompson, Credit Cards Writer at The Points Guy. “When it's time to take out a car loan or get a mortgage, a lot of people have this huge hurdle in spite of financially responsible habits.”
But our credit score — that little three-digit number that determines so much of our financial lives — is incredibly important to start building as early as we can. Years of responsible spending on a credit card can establish you as a trustworthy candidate for future loans for bigger things like cars and homes. Here’s how to get started.
Before You Apply: Your Credit Report And Credit Score
Even though it sounds a bit counterintuitive, you need to review your credit report before you ever apply for your first credit card. Because some cards are only available to people with good or excellent credit, you may end up wasting your time by applying for cards you won’t even qualify for. When you first check your credit report, you’ll see a history of prior credit behavior. If you have student loans, for example, you should see them. If you don’t — and you’ve never borrowed before — you may not have a credit report. That’s not something to be alarmed about. In fact, it’s the opposite. If you’ve never borrowed, a thick credit report with a lot of information is a sign that you may have been a victim of identity theft. Either way, make sure to read it carefully for any inaccuracies, and dispute them with the credit bureaus if you find them.
Next, your credit score. A credit score is a three digit number that typically ranges from 300 to 850. Your credit score is based on information in your credit reports, and the three main credit reporting bureaus — Experian, Equifax and TransUnion — are in the business of gathering information for your credit file. They get that information from financial institutions and public records.
Your credit score helps credit unions, banks and other businesses decide how much of a financial risk you are. It’s based on your history as a borrower, along with several other patterns of financial behavior. If you have a low score, it can indicate to a lender that you could be more likely to pay late or default on a loan. Conversely, the higher your score, the better the rates you’ll qualify for with mortgages, auto loans, credit cards, and other types of loans.
Again, if you’re new to credit, there’s a chance you won’t have a score at all. Don’t let this discourage you. While this means that while you likely won’t be eligible for a fancy platinum card, as long as you have income you should be able to get a solid starter card that’s perfect for your needs as a first-time credit builder.
“It's important to adjust your expectations, because a lot of what we think of with credit cards, in terms of rewards and things like that, just aren't going to be available to you on that first credit card,” Matt Schulz, Chief Credit Analyst at LendingTree, says. But that’s okay — the goal right now is building your credit and paying your bills on time, every time. The rewards can wait.
What to Know About Your Credit Limit And Interest Rate
When you get approved for a credit card, your credit union or bank will assign you a credit limit, or a maximum amount you can borrow. Especially when you’re just starting out, this number will be pretty low, probably only a few hundred dollars to a couple thousand dollars. Keep in mind: This is a credit limit, not a spending goal. A good rule of thumb is to never use more than 30% of your credit limit, because if you go over that mark, your credit score will suffer.
Paying on time, every month, and always paying your bill in full help to avoid the downsides of borrowing money: interest charges and late fees. With that said, things happen, and you may occasionally have a month or two where you need to carry a balance. Just make certain you always pay at least the minimum amount, since late fees can a) add up quickly and b) paying late damages your credit score, which is the exact thing you want to avoid right now.
Speaking of interest rates, even good first credit cards usually have high interest rates. “If you can find a card in the low 20% range, you should probably scoop that up,” Schulz says. “But don't be too surprised if your interest rate is 25% or higher.” Of course, this just makes it even more important to only charge what you can comfortably repay at the end of every month. If you’re not carrying a balance, you’re not paying interest at all!
What To Know About “Secured” Cards
Ever heard of a secured credit card? For people with little to no credit history, secured cards can be a great way to start building credit. Essentially, the way secured credit cards work is that you put down a deposit — let’s say $500 — which then becomes your credit limit for that account. Because your limit comes directly from a deposit you put down when opening the account, there’s virtually no risk to the credit union or bank — which means almost anyone can get approved.
“I'm a big fan of secured cards for somebody's first card, because they minimize the risk to everybody involved,” Schulz explains. “Secured cards can be a great stepping stone, but it's also something that you shouldn't have for all that long.”
The only downsides are that once you deposit money into your credit account, you can’t then use it for other things — and you also can’t increase your credit limit without putting more money down. So while secured cards can be great if they’re the only credit card option you qualify for, plan to try to upgrade to a traditional credit card after you’ve established a track record of a year to 18 months of on-time payments.
How to Shop For The Best Card
Now that you know how credit cards work, it’s time to choose the first card to go in your wallet. As much as we wish the “ultimate beginner” credit card existed, it doesn’t.
“There's not a one size fits all answer for what the best credit card is,” Schulz says. “It really is about what you want from the card, how you spend on the card, and how comfortable you are with managing your credit card.”
Start by focusing on the cards available for someone with your credit score, and then start comparing everything about those cards, including interest rates, fees, any rewards offered, and other perks. And make sure you check with your credit union to see what’s on their menu as well — often the interest rates are lower and the fees (when there are any) are less.
Whatever you do, do NOT fall into the trap of going into credit card debt to earn rewards — you’ll never come out ahead. “The interest rate is way higher than the value of the rewards that you'll earn,” Thompson says. “You might end up earning, say, a 5% return on your spending with your rewards, but if you’re then paying 25% in interest, that’s not a good deal.”
Got Your Card? Congrats! Now It’s Time To Be Responsible With It
Getting approved for your first credit card is a huge deal — but it’s only the beginning. In order to build the kind of good credit that will set you up for a stress-free financial life, you’ll need to make sure you pay every bill on time, and always try to pay your balance in full. Just set a budget for yourself and treat your credit card like regular cash (not an infinite resource), and you’ll be golden.
