Getting your first credit card is a huge milestone — and a big adjustment. You might already have a sense of how credit cards work and how to handle a credit card responsibly, but the devil is in the details. Understanding those ins and outs before diving in will save you money and help you build good credit more quickly.
|NERDWALLET'S GUIDE TO YOUR FIRST CREDIT CARD|
|• Guide homepage
• 11 things to know before getting your first credit card
• Am I ready for my first credit card?
• How to qualify for your first credit card
• 7 options for your first credit card
• How to use your first credit card
1. The best credit cards aren’t for beginners
As a newcomer to credit, you probably won’t be able to qualify for the most valuable credit cards — the ones with rich rewards and perks, big sign-up bonuses or long 0% interest periods. Those cream-of-the-crop products are available only to applicants with good or excellent credit (scores of 690+) and longer credit histories who meet certain income requirements.
You’ll likely have to start smaller with your first credit card, with a product geared toward people with limited or no credit history. It’s not all bad news, though — many such cards offer decent rewards and don’t charge annual fees. Some options to consider include:
- A student credit card, or a credit card designed for college students.
- A secured credit card, or a card that requires a cash deposit.
- A credit card marketed to those with fair credit, generally defined as a credit score of 630 to 690.
- A credit card you pre-qualify for, either through your bank or online using NerdWallet’s pre-qualification page or other similar tools.
2. A security deposit makes a credit card easier to get
If you’re having trouble getting approved for your first credit card — say, because you’re starting out with no credit at all — try a secured credit card.
Secured credit cards are designed for people with damaged credit or no credit. To open your account, you’ll first need to put down a cash deposit. Your credit limit is typically equal to your deposit. Minimum deposit requirements range from $200 to $500, depending on the card. Most secured cards allow you to deposit more to get a higher credit line.
Falling behind on payments could mean losing this deposit. However, if you always make on-time payments and spend well below the card’s limit, you could establish good credit within a matter of months. At that point, your issuer might upgrade the account to a regular unsecured card, or you might apply for an unsecured card and close the secured card in good standing. In either case, your deposit would be refunded.
3. Your first credit card can build your credit — or ruin it
One of the main reasons to get your first credit card is to boost your credit. If you’re not careful, though, it can have the opposite effect. It all depends on what you do.
Every month, your issuer will report your credit card activity to credit bureaus — the companies that compile the credit reports that form the basis of your credit scores. The reported information includes whether your payments have been on time and how much of your available credit you’ve used. Late payments are bad. Maxing out the card is bad.
To make sure your credit card activity helps as much as possible, pay in full and on time every month and stay well below your credit limit. (A good rule of thumb: Keep your balance under 30% of your available credit at all times.) You can also track your credit scores to see where you stand. You can get your free credit score on NerdWallet to monitor your progress.
4. You can see the rates and fees before applying
Credit card issuers are required by federal law to publicly disclose certain terms, such as interest rates and fees, before you apply. These are displayed in what’s called a Schumer box, a table that can usually be found on a credit card’s application page online (look for a link marked “Rates and fees,” “Pricing and terms” or something similar) or on a slip enclosed in paper applications. The Schumer box includes the card’s:
- Annual fee, or what it charges cardholders on a yearly basis.
- APR, or annual percentage rates. This is the interest rate you’ll pay on balances you carry from month to month. Some cards charge different rates on different types of balances, including purchases, balance transfers (debts moved to the card from other accounts) and cash advances (cash withdrawn with the card, usually at an ATM). Some cards, though not many, also have penalty APRs, which they impose after a late payment.
- Foreign transaction fees, or fees charged when making purchases outside the U.S. — typically, 3% of the amount charged.
- Late fees, which are charged when you pay late by even a day or if you don’t pay at least the minimum amount due.
Of course, there’s some information you won’t get until after you apply. For example, in most cases you won’t know what your credit card limit is until your application is approved.
5. Credit card fees are avoidable
It’s possible to avoid credit card fees altogether, even if you’re new to credit:
- Plenty of excellent starter cards, including many secured cards, don’t charge annual fees.
- Late fees aren’t an issue if you pay on time.
- Foreign transaction fees are irrelevant if you don’t plan on using the card to make charges outside the U.S. — and several issuers don’t charge foreign transaction fees anyway.
- The charges associated with balance transfers and cash advances are a moot point if you never make these types of transactions.
- Over-limit fees, imposed when you exceed your credit limit, are all but extinct. Issuers can’t charge them unless you opt into over-limit protection (when the issuer covers charges above your limit) — and even then, you can avoid them simply by staying within your limit.
6. Interest is completely avoidable, too
Speaking of avoidable expenses: Regardless of how high your credit card APR is, you don’t have to pay a dime of interest as long as you pay your credit card bill in full every month. That’s because of your card’s grace period. Simply put, after you pay your bill in full, interest won’t start accruing on new purchases until the next due date. Pay the next month’s bill in full, and once again interest won’t accrue, assuming you’re only using your card for purchases. Keep it up, and you’ll never have an interest charge.
However, if you don’t pay your bill in full — that is, if you carry a portion of your balance over to the next month — then not only will you pay interest on that carried balance, but interest will begin accruing on new purchases immediately.
7. You can — and should! — pay more than the minimum
Credit card statements prominently display your minimum payment due, or the smallest amount you need to pay to keep your account in good standing. That can be confusing. It might read like a friendly suggestion: “You can pay the full amount, but you could also get away with paying this much smaller amount!”
In reality, paying less now generally means paying much more later. The minimum typically covers the past month’s interest and fees (if any) and only a small amount of the underlying balance. So when you pay only the minimum, you aren’t making much of a dent in your actual credit card debt. You’re mostly treading water. If you continue to make purchases on the card, that can lead to an out-of-control balance.
8. Paying late comes at a high cost
Missing your due date can get expensive quickly. Depending how late your payment is, you could face:
- Late fees. The legal limits on these fees are adjusted annually. But generally, the first time costs well over $20, and subsequent violations can be close to $40.
- Penalty APRs. Most credit cards no longer charge penalty APRs, but some do. A penalty APR kicks in when you pay late, and can increase your interest rate to 30% or more right away for new transactions. And if the payment is more than 60 days late, that penalty APR can also be applied to your outstanding balance.
- Damage to your credit. Paying a day late 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, hurting your credit scores.
Consider setting up automatic payments from your bank account. Or, if you’re worried about overdrawing your account, note your due dates on a calendar as a reminder.
9. Getting too close to your limit can sink your credit score
The percentage of available credit you use is called your credit utilization ratio. This is a major factor in your credit scores. When your utilization ratio creeps up too high — if, for example, you have a balance of $1,500 on a card with a $2,000 limit — your credit scores can take a beating.
The lower your credit utilization ratio is, the better. To keep your score in good shape, try to use less than 30% of your limit at all times. That way, you can be sure that whenever the issuer reports your account’s status to the credit bureaus, your balance won’t be too close to your limit.
10. Dealing with credit card fraud isn’t as difficult as it sounds
If fear of fraud has made you reluctant to pull the trigger on your first credit card, understand that credit cards actually offer you more protection against fraud than debit cards do.
If crooks gain access to your debit card information, they could empty your bank account in an instant. You can report the fraud to your bank and recover your money, but that will take time to straighten out — and in the interim, you could be strapped for cash.
When your credit card information is used fraudulently:
- It’s the credit card company’s money at stake, not yours. You’ll have plenty of time to dispute any fraudulent charges and remove them from your outstanding balance, typically right away.
- You don’t have to pay. Federal law minimizes your liability for unauthorized credit card purchases, and zero-liability policies of credit card networks like Visa and Mastercard generally bring your liability down to $0.
- Getting a replacement card is relatively easy. After you call your issuer to alert them about fraud on your account, they’ll 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’re rejected for a credit card, the issuer will tell you why
Getting rejected for a credit card is a bummer, but you can learn from it. Card issuers are required by federal law to send you an explanation for their decision, called an adverse action notice. For example, an issuer might say you were rejected because your income was too low, or you lack a credit history. This feedback could help you decide how to improve your chances for approval next time.