Understanding the basics can save you time, money, and aggravation and get you on your way to building good credit.
Claire Zosi January 5, 2021
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Getting your first credit card is a big milestone and a great fit. You may already have an idea of how credit cards work and how to handle a credit card responsibly, but the devil is in the details. Understanding these ins and outs before diving in will save you money and help you build good credit faster.
1. The best credit cards are not for beginners
As a newbie to credit, you probably won't be able to qualify for the most valuable credit cards-those with rich rewards and benefits, big sign-up bonuses, or long 0% interest periods. These cream growing products are only available to applicants with good or excellent credit (690 + points) and a longer credit history who meet certain income requirements.
You'll probably have to start less with your first credit card, with a product designed for people with or without a limited credit history. However, it's not all bad news: many of these cards offer decent rewards and don't charge annual fees. Some options to consider include:
A student credit card or a credit card intended for college students.
A secured credit card or a card that requires a cash deposit.
A credit card sold for those with fair credit is usually defined as a credit rating between 630 and 690.
A credit card that you are pre-qualified for, either through your bank or online, using the NerdWallet pre-qualification page, or other similar tools.
The list is here.
Check out the best credit cards of 2021 for money back, rewards, and more. All backed up by tons of botanical research.
2. Collateral makes a credit card easier to get
If you're having trouble getting your first credit card approved, for example, because you're starting out with no credit, try a secure credit card.
Secured credit cards are designed for people with damaged credit or no credit. To open your account, you first need to make a cash deposit. Your credit limit is usually equal to your deposit. Minimum deposit requirements range from $ 200 to $ 500, depending on the card. Most guaranteed cards allow you to deposit more to get a higher line of credit.
A delay in payments may mean the loss of this deposit. However, if you always make payments on time and spend well below the card limit, you can set up a good credit within a few months. At this point, your issuer can upgrade your account to a regular unsecured card, or you can apply for an unsecured card and close the protected card in good condition. In any case, your deposit will be refunded.
Botany Tip: Secured credit cards are different from prepaid debit cards. With prepaid debit cards, you load money into the card, and purchases are deducted from the balance. This card activity does not affect your credit. With a secured credit card you will have to make the monthly payments on credit cards, that is, fees are not deducted from your security Deposit and the activity cards affect your credit.
3. Your First Credit Card Can Build Your Credit-or Ruin It
One of the main reasons for getting your first credit card is to increase your credit. If you're not careful, however, it can have the opposite effect. It all depends on what you do.
Each month, your issuer will report your credit card activity to credit bureaus, the companies that make up the credit reports that form the basis of your credit scores. The reported information includes whether your payments were on time, and the amount of your available credit that you used. Late payments are bad. Maximizing the map is bad.
To make sure that your credit card activity helps as much as possible, pay in full and on time each month and stay well below your credit limit. (A good rule of thumb: keep your balance below 30% of your available credit at all times.) You can also track your credit scores to see where you stand. You can get a free credit score on NerdWallet to track your progress.
4. You can view the rates and fees before submitting your application
Credit card issuers are required by Federal law to publicly disclose certain conditions, such as interest rates and fees, before applying. They are displayed in a so-called Schumer chart, a table that can usually be found on the online credit card application page (find a link labeled "fees and charges, ""prices and conditions," or something similar), or in a slip enclosed in paper applications. The Schumer box includes a map:
The annual fee, or what it charges cardholders on an annual basis.
APR, or annual interest rates. This is the interest rate you will pay for the balances you carry from month to month. Some cards charge different fees for different types of balances, including purchases, balance transfers (debts transferred to the card from other accounts), and cash advances (cash withdrawn from the card, usually at an ATM). Some cards, though not many, also have penalty aprs that they impose after a late payment.
Fees for foreign transactions or fees charged when making purchases outside the United States.
Late payment fee, which is charged when you pay late even for one day or if you do not pay at least the minimum amount.
Of course, there is some information that you will not receive until you submit your application. For example, in most cases, you won't know what your credit card limit is until your application is approved.
"More" how to apply for a credit card online
5. credit card fees can be avoided
5. credit card fees can be avoided
You can completely avoid credit card fees, even if you are new to credit:
A lot of great starter cards, including a lot of protected cards, don't charge annual fees.
Late payment is not a problem if you pay on time.
The fee for transactions abroad doesn't matter if you don't plan to use the card to pay outside of the United States, and several issuers don't charge a fee for transactions abroad anyway.
The fees associated with balance transfers and cash advances are a moot point if you never make such transactions.
The over-the-limit fees imposed when you exceed your credit limit are almost paid off. Issuers can't charge them unless you opt for over-the-limit protection (when the issuer covers fees above your limit)-and even then, you can avoid them by simply staying within your limit.
6. interest can also be avoided
Speaking of avoidable expenses: No matter how high your apr credit card is, you won't have to pay a penny of interest, as long as you pay your credit card bill in full each month. This is due to the grace period of your card. Simply put, once you pay your bill in full, the interest won't start accumulating on new purchases until the next due date. Pay the bill in full next month, and again, no interest will accrue, provided you only use your card to make purchases. Keep it up, and you'll never get an interest fee.
However, if you do not pay your bill in full, that is, if you transfer part of your balance to the next month, you will not only pay interest on this realized balance, but you will immediately start accumulating interest on new purchases.
7. You can - and should! - pay more than the minimum
Credit card statements prominently show your minimum payment or the smaller amount you need to pay to keep your account in good condition. This can be confusing. You can read this as a friendly suggestion: "you can pay the entire amount, but you can also get away with paying this much smaller amount.”
In fact, paying less now usually means paying much later. The minimum usually covers last month's interest and fees (if any) and only a small amount of the base balance. So when you only pay the minimum, you don't make much of a dent in your actual credit card debt. Basically, you step on the water. If you continue to make purchases on the card, this can lead to an uncontrolled balance.
8. late payment has a high cost
Losing the expiration date can be expensive quickly. Depending on how late your payment is, you may encounter:
Late payment fee. The legal limits of these fees are adjusted annually. But in general, the first time costs more than $ 20, and subsequent violations can be close to $ 40.
APRs penalty. Most credit cards no longer charge penalty APRs, but some do. The APR penalty starts when you pay late, and you can increase the interest rate to 30% or more immediately for new transactions. And if the payment is more than 60 days overdue, this APR penalty can also be applied to your outstanding balance.
Damage to your credit. Paying one day later won't hurt your credit. But if you pay 30 or more days late, your payment will also be recorded as late on your credit reports, damaging your credit scores.
Consider setting up automatic payments from your bank account. Or, if you're worried about overdrawing your account, write down the expiration dates on your calendar as a reminder.
9. Getting too close to your limit can sink your credit score
The percentage of available credit that you use is called the credit utilization rate. This is an important factor in your credit scores. When your utilization rate creeps too high - if, for example, you have a $ 1,500 balance on a card with a $ 2,000 limit-your credit scores can be beaten.
The lower the loan utilization rate, the better. To keep your account in good shape, try to use less than 30% of your limit at any time. This way, you can be sure that every time the issuer reports the status of your account to the credit bureaus, your balance will not be too close to your limit.
10. Dealing with Credit Card Fraud Isn't as Difficult as It Sounds
If the fear of fraud made you reluctant to pull the trigger on your first credit card, realize that credit cards actually offer you more fraud protection than debit cards.
If criminals gain access to your debit card information, they can instantly empty your bank account. You can report the fraud to your bank and get your money back, but it will take time to straighten out - and in the meantime, you may be strapped for cash.
When your credit card information is used fraudulently:
The credit card company's money is at stake, not yours. You will have plenty of time to challenge any fraudulent payments and remove them from your outstanding balance, usually immediately.
You don't have to pay. Federal law minimizes your liability for unauthorized credit card purchases, and the zero-liability policies of credit card networks such as Visa and Mastercard typically reduce your liability to $ 0.
Getting a replacement card is relatively easy. After you call your issuer to alert them of your account fraud, they will cancel your card and send you a new one with a new number. No one will be able to make transactions using your old card number.
11. If you are denied a credit card, the issuer will tell you why
Being rejected by a credit card is a bummer, but you can learn from it. Federal law requires card issuers to send you an explanation of their decision, called an adverse action notice. For example, an issuer may say that it was rejected because its income was too low, or that it lacks a credit history. This feedback can help you decide how to improve your chances of getting approved next time.
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