If you're in college—or have recently graduated or started your first job—it may be time to start thinking about another American rite of passage into adulthood: Getting your first credit card.
On average, American consumers today get their first credit card at age 20. Gone are the days when credit card companies set up tables on college campuses, enticing young adults with free swag if they applied for a card. The Credit CARD Act of 2009, which put tougher regulations in place for credit card companies, made it more difficult for anyone under the age of 21 to obtain a credit card.
But establishing your credit as a young adult is still important.
“Not only is a credit card a wonderful convenience, it helps you build a credit profile, which you'll need to obtain future loans, such as a mortgage, at better interest rates," says Kevin Gallegos, vice president of Phoenix (AZ) operations for Freedom Financial Network, an online financial services provider. “It can also help you get approved for an apartment or cell phone, avoid some utility company deposits, and be eligible for lower insurance premiums."
It can also land you in deep water if you misuse or abuse the privilege of a credit card. Millennials younger than 35 have an average credit card debt of $5,808—slightly higher than the national average of $5,700. That's a lot of money—especially when you consider the finance charges.
So, how can you establish your credit and learn to use it wisely? It starts with knowing the right questions to ask to find a first credit card that fits your needs, your budget, and your lifestyle.
Ask yourself these 14 questions, and you'll find the best first credit card for you. You're welcome!
So, what's my credit score?
Finding the right credit card begins with knowing your credit score or FICO score—the three-digit number that tells financial institutions how likely you are to pay your bills on time. (Fun fact: FICO is an abbreviation for Fair Isaac Corporation, the very first company to offer a credit-risk model with a score. The name comes from a combination of the founders' last names: Bill Fair and Earl Isaac.)
“Your credit score tells banks and creditors how you pay your bills," says Wayne Sanford, owner of New Start Financial Corporation, a credit counseling agency based in Fort Worth, Texas and author of “The Real World of Credit." Like most scores, it also reveals a number of things about how skilled and adept you are; in this case, it's a measurement of how well you manage your money.
“Your credit score takes into account, among other things, your past payment history, total outstanding debt, length of credit history, and the types of loans and credit you have," explains Gallegos.
Here's a breakout of what comprises your FICO score for those visually inclined, courtesy of MoneyNation:
As you can see, the key factors to boost your credit score are paying your bills on time and spending only a portion of your credit limit.
When you apply for a credit card, the creditor will check your FICO credit score with one of three bureaus: Experian, Equifax, or TransUnion—the private agencies that track and report whether you pay your bills on time in the form of your credit report. “The lower the number, the less likely your chances of securing credit," says Gallegos. You can view this information in detail on your credit report (more on that soon).
Of course, if you've never had a credit card before, your score may be low or even non-existent.
So what happens if you have no credit history because you've never had any payments for the credit bureaus to track? Glad you asked! In this case, other factors—such as on-time rent or utility payments and even your job history—may be used to help determine your creditworthiness. You may even be able to get a secured credit card linked to a bank account with a set limit—say $500—that you can use to establish a credit history, demonstrating to lenders that you pay your bills on time.
It is very important to have a clear picture of your credit worthiness, especially when you're just staring out. “Check your credit reports at each of the three bureaus to ensure all the information is correct," advises Jim Wang, founder of Wallet Hacks, a personal finance blog.
You can obtain a free copy of each of your three credit reports annually at AnnualCreditReport. “If it's your first card, you probably won't have much information, but it's good to confirm that what is recorded is accurate."
What credit card will I be able to get?
Credit card companies divide their offerings into “tiers." A “tier one" credit card, available to those with an “excellent" credit score of 700+, will offer the lowest interest rates and perks like cash or travel rewards.
However, a first-time credit card applicant with no credit history isn't likely to qualify for such a card.
The good news: Anything greater than 620 should qualify you for a credit card if you're over 21 and working full time, although it may not have the best interest rate or rewards," says Sanford.
According to Alex Cohen, founder of Birchfinance, a credit card rewards optimization app, once you know your score, “you can narrow down your first time credit card search to those with likely approval rates based on your credit and income."
There are even websites—like ours—that can guide you to the right type of card for you. Get set to spend some time sorting through your options; in this case, time is money—it'll be well spent, we promise!
Will I qualify for a student card?
If you're a full-time college student, you may qualify for a credit card tailored to students. These cards have less stringent requirements to qualify; some may even take your grades into account when determining your creditworthiness.
The drawback? These first time credit cards won't give you a lot of spending power as your credit limit will be—well, limited (but with good cause). “Most student credit cards give you a $300 to $500 credit limit, which gives kids a place to start to build a credit history," says Sanford.
If you show a history of on-time payments, the provider is likely to review your file and increase your credit limit after six months or a year, says Sanford. Research sites like MoneyCrashers, which provide top 10-type reviews of the best student credit cards based on factors like interest rate, annual fees, sign-up bonuses, and more.
Can I get a co-signer?
If you can't qualify for a card on your own and you're not a student, you may be able to get a co-signer, says Sanford. A co-signer is someone with a strong credit history who is willing to say, “Yes, I trust you."
If you don't pay up, however, the co-signer is, ultimately, responsible for that debt. These cards are harder to come by than they were in the past, because credit card companies have introduced more stringent qualifications—once again, as a result of the CARD Act.
It's important to understand the difference between an authorized user and a co-signer. If you're an authorized user on someone else's card, your purchases and on-time payments will reflect positively on your credit report, but won't carry as much weight as using a card of your own responsibly.
When someone co-signs for a card in your name, they are vouching that you will pay the bill on time. If you don't pay it, they are responsible for the charges, and the late payments will appear on both your credit reports and affect each of your credit scores.
Can a secured credit card be converted to an unsecured card if I make on-time payments?
If you can't qualify for your first credit card on your own and can't get a co-signer, there's another solution: Apply for a secured credit card.
A secured credit card is similar to a pre-paid debit card; you deposit an amount onto the card, and are allowed to charge up to that amount.
Unlike a pre-paid debit card, however, there are payments to be paid—on time—and those payments are reported to the credit reporting agencies.
A secured card can be a stepping stone to your first unsecured credit card. “Ask if you can convert the card from secured to unsecured with a year's worth of on-time payments," says Sanford.
Does this card have an annual fee?
Some credit cards have annual fees— a fee you pay each year for the privilege of using that credit card. Annual fees typically range from $25 to $75 each year, though some high-end credit cards charge annual fees of several hundred dollars.
Most secured cards have annual fees, but you'll also find annual fees on some top tier rewards cards as well.
“For unsecured cards, annual fees are often charged on high-value rewards credit cards," writes Erin El Issa at NerdWallet. These annual fees can be offset by the rewards you can earn.
“An annual fee is not a deal breaker, especially if the other attributes of the card are a good fit for you," says Dominique' N. Reese, owner of Reese Financial Services and author of “Master My Money: 16 Steps to Solve Your Money Problems & Create a Foundation for Financial Freedom." Once you boost your credit score, you'll have more credit card options that don't necessarily charge an annual fee.
What other fees are associated with this credit card?
“Fees to look out for include late fees, over-the-limit fees, and balance transfer fees," says Cohen. You'll find this information in the fine print of the credit card application. Want to avoid them? Pay the bill on time and always stay within your credit limit.
If you plan to use your card for international travel—which is a good idea because it's easier to replace a lost or stolen credit card than cash—look for a card with no foreign transaction fees. “You can avoid paying up to 3 percent on purchases abroad," says Cohen.
Let's say you plan to spend $1,000 on a vacation to Mexico. Do you want to pay $30 to the bank just for using your card overseas? If you don't travel overseas very often, or don't spend much when you do, then maybe choosing a card with no foreign transaction fees isn't worth it. Think about where you want your hard-earned dollars to go, and then decide.
What is a "balance transfer?" How does it work?
When you review credit card offers, you might see something like “O% balance transfer for 12 months." Or even “No balance transfer fees." What does this mean?
As a first-time credit card user, you won't quality for these right away. You can only make a balance transfer if you have another credit card with a balance. If you do, you can transfer the balance to your new card, using one credit card to pay another.
A few facts you should know about balance transfers:
- Credit card companies sometimes charge a fee, usually 3% of the balance you're transferring.$1,000 balance on your current credit card? Transferring that amount to your new card will cost you - in this instance - $30.
- The interest rate on a balance transfer may be different than on purchases.
- As your credit history matures, you may find balance transfers are a good way to save money on interest if you have a credit card with a balance you can't pay off right away.
What is the "APR?" How is it calculated?
The APR, or annual percentage rate, on a credit card tells how much interest you'll pay on purchases if you carry a balance from month to month.
“Most credit card APRs are in the double digits," says Reese. “Ten to 20 percent is typical and acceptable. Try to avoid any card with an APR over 20 percent."
Understanding how that APR is calculated can save you confusion when you look at your monthly statement, according to Yahya Mokhtarzada, founder and CEO of Truebill, an app that helps consumers find, track, and cancel unwanted paid subscriptions to save money.
“First-time credit card users think they're only charged interest on the balance that is on their card on the statement date," says Mokhtarzada. "In actuality, users accrue interest based on their average daily balance over the month."
Translation: Even if you pay your existing credit card balance in full the day before your next monthly statement arrives, you won't dodge the interest charges from the previous month. The credit card company looks at your balance every day of the month, and calculates the interest based on that.LaToya Irby, over at the consumer finance news site, The Balance, does a good job of breaking average daily balance concept down and linking it to APR. Take a look at her explanation. LaToya writes,
Let's say your APR is 12% and your billing cycle is 25 days long.You started the billing cycle with a balance of $100.
On Day 4, you made a $100 purchase.
On Day 20, a $25 payment was credited to your account.
Your daily balance for each day during the billing cycle would be:
Day 1 – 3: $100
Day 4 – 20: $200 ($100 purchase)
Day 20 – 25: $175 ($25 credit)
To calculate your average daily balance you must total your balance from each day in the billing cycle (even the day's that your balance didn't change) and divide the total by the number of days in the cycle.
(Day 1 Balance + Day 2 Balance + Day 3 Balance…) / number of days in billing cycle$4575 / 25 = $183.
LaToya helpfully goes on to explain how to calculate the average daily balance finance charge related to your APR. She says,
Calculating the average daily balance is the hardest part. From there, you simply multiply by your credit card's APR and number of days in the billing cycle to calculate the finance charge.
Based on the details listed above, your finance charge using the average daily balance method would be:$183 * .12 * 25 / 365 = $1.50
If you continued making minimum payments and no additional charges on this account, you'd pay $18.00 in finance charges over the course of a year.
Ms. Irby nailed what is a minimum payment and how your credit card issuer will calculate your bill. She's being nice and using a relatively low balance to help explain how APR is calculated, since most credit card users have a monthly balance much higher than $200. Based on a 2014 report by the Federal Reserve, the average American has a balance of $5,700 on their cards. Yikes!
What is a "minimum payment," and how is it calculated?
The minimum payment is the minimum amount you have to pay each month if you have a balance on your card. Every card has a payment due date. Know yours well. Add a Google Cal reminder and/or make sure you set up an automatic payment with your bank so you never miss a payment.
Why? If you don't make the minimum payment by the due date, it could be reported to the credit bureaus as a late payment, hurting your credit score. You don't want this to happen.
Beware—not all minimum payments are calculated the same way.
“Typically, credit card companies charge a percentage of the unpaid balance as the minimum payment," writes Eric Bank at CreditRates.
So if you owe $1,000 on a card with a 2.5 percent figure, you'll have a $25 minimum payment for the month.
Heads up! You don't have to just pay the minimum payment amount. You can pay off the entire balance or somewhere in between that amount and the minimum payment required.
Some cards, however, charge a percentage of the interest owed.
So if you have a credit card with a 24 percent APR, you may owe one-twelfth of that, or two percent.
On a $1,000 balance, that would be $20.
Beware of credit cards that do this, because if you pay only the minimum, you'll only cover the interest charge—and won't make a dent in paying off your balance. You'll just be paying interest, and it will take you more time and money to pay off your debt.
Once you know how your creditor calculates your minimum monthly payment (which you should), you can find out how long it will take to pay off your balance if you pay only the minimum.
Figure that out using this Bankrate calculator, or simply look closely at your credit card statement, because the company must print this information in a chart on your bill.
Chances are, you probably won't even remember the new boots and jeans you splurged on when you finally pay that credit card bill off seven years later! Spend wisely!
What is the "minimum balance?"
If you hear someone refer to the “minimum balance," they might actually be referring to the minimum payment. There is another similar term you should know, though: Your "closing balance."
The closing balance on your bill is how much money you owe when the credit card company issued your statement. You should try to pay that amount each month, since that means you are paying your card in full and avoiding interest charges.
What is the "credit limit?"
The credit limit is the maximum amount you are permitted to charge on the card in total. If you go past this amount, your purchase may be declined or you may be charged an over-the-limit fee.
Like the APR, your credit limit will depend on your credit score. Student cards, secured credit cards, and retail cards—which are all relatively easy to obtain if you meet specific criteria—may start with a credit limit of $500 or less. On a secured card, your credit limit is equal to your security deposit.
Regardless of your credit limit, you do need to keep spending in check.
“Do not plan to 'max out' the card," says Gallegos. “As a general rule, leave as much room on credit cards as possible."
To build your credit score, nearly every expert recommends keeping your balance—also known as your credit utilization ratio—below 20 to 30 percent. In other words, if your credit card has a limit of $200, you don't want to run the balance higher than $40,which is 20 percent of $200.
But make sure to use the card at least once each month. It's only by using it and paying it in full, or carrying a small balance below 10 percent, that you'll increase your credit score.
“Credit agencies rely on past payment history to gauge how borrowers will do in the future," says Gallegos.
So, by following these first credit card tips and paying your bills on time, you can build a credit history that shows creditors you're a good risk. That's when you enter a new world of higher credit limits, lower interest rates, and high-end rewards cards.
What rewards can I earn?
Most credit cards for first-time applicants don't offer rewards, but it's good to explore these possibilities as your credit score improves. Retail store credit cards, however, may offer discounts or rewards points for that store, and are often a good option for consumers with no credit history.
“They often have lower credit limits, lower credit score requirements, and are a good way to build credit," says Wang. Store credit cards may not help in an emergency if you need access to cash for surprise expenses. But if you're unsure about your ability to manage credit, they are a good stepping stone to learn self-restraint and good credit management.
Can I use credit responsibly?
Before you take the important first step of considering any credit card, says Sanford, “judge yourself." And consult this handy checklist, courtesy of Sanford, of other questions to specifically ask yourself:
- Do you have the discipline required to manage a credit card?
- Are you a shopper?
- Do you like to spend?
If you answered yes to the above, you may want to get a secured credit card, says Sanford, “because then you know you can't charge more than your security deposit."
If you decide you do have the discipline to use a credit card responsibly, says Gallegos, “make a commitment to charge no more than you can pay off in full at the end of each month, and do so on time."
If you aren't sure, Wang advises using a tool like the You Need a Budget (YNAB) app to help establish a budget—and then stick to it. Like other popular budgeting tech tools, YNAB offers an easy way to track your spending as soon as you make a purchase and end-of-month reports that show you where your money went.
“If you look at your budget and anticipate you can't pay off your balances each month, don't get a credit card," says Wang. Period.
“The most devastating thing that can happen to your credit report and credit score is not paying your bill on time," warns Sanford. “Credit's important, but you have to know how to manage it properly."
The first step to managing credit is knowing how to choose the best credit card for you after you understand the ins and outs of responsible credit card usage. So congrats—if you made it this far, you're just about there! Go get a copy of your credit report, consider your spending habits, and follow our first credit card advice to start building your credit score and you'll reap the rewards of excellent credit before long.
After you've asked yourself these 14 questions, you're better-equipped for the responsibility of a credit card. Think you're ready to apply?