Now that you’re a postgrad, you’re taking the high road to a responsible, bright future. That means you’re not making decisions lightly when it comes to things like who you live with or where you work. So, why should choosing a credit card be any different?
Some credit card offers will be better for your financial life than others. Before you make a decision, you’ve got some research to do.
Credit cards are the easiest way to build your credit history. Misusing your card is also the fastest way to ruin your score. Your credit history and score matter when you want to get a loan at a favorable rate. Your credit also influences your insurance premiums and whether you can get approved for an apartment or even a cellphone.
If you already have a credit card geared toward college students, you might want to consider a new card that offers higher limits or rewards better geared toward postgrad life. That doesn’t mean you should close the card you have now.
“I never recommend dropping a credit card, especially if you have a good history with it. Depending on when you got that first card you’ve built some history and history counts,” says Katie Ross, education and development manager at American Consumer Credit Counseling in Worcester, Massachusetts. “Check your report and your score, then instead of closing your first card, open up another one. What will happen is, if you’ve had a good credit history with that one, chances are you’re going to be able to get a good card with lower interest rates.”
Before you can get a new card, you first need to know what you’ll qualify for.
Your credit score is what determines your risk to a lender. The score ranges from 300 to 850, with a higher score being better. The FICO score is the most common credit-scoring model used. There are five main factors that go into your credit score that you should consider when you’re using your credit card:
- Payment history (35%): Do you pay your bills on time, or do you make late payments?
- Amounts owed (30%): Keeping your credit card balance low improves your score.
- Length of credit history (15%): How long have you been extended credit? This includes student loans.
- New credit (10%): How many accounts have you opened, and how recently? You don’t want to open too many accounts at once. Every time a lender looks into your credit history it dings your credit score.
- Types of credit used (10%): What kind of credit do you have? This includes anything from credit cards to student loans and car loans.
You can get your credit report for free once a year from each of the three major reporting agencies — Experian, Equifax and TransUnion. That means three times a year you can check up on your credit report. Although your report is free, your score generally isn’t. However, many big banks and certain credit card companies will offer score information for free.
If you have a full-time job and enough credit history to get a standard credit card, then kudos! Proceed to the next section. If you don’t have any credit history or a poor score, you’ll need to take a different route. Consider these two options:
- Get a co-signer. You might be out of college, but you can always use some help from mom and dad. Your parents or another trusted person with a lengthy credit history can sign the credit card with you. This enables you to build up your own credit history. However, your credit actions are tied to your co-signer’s credit history, too, so proceed carefully.
- Try a secured credit card. A secured card is meant to help you build credit so you can qualify for an unsecured card. You make an initial deposit that is equal to your line of credit, then you borrow against the deposit and pay your bill on time every month to build credit over time. When you close out the account, you’ll get your deposit back.
When picking your first credit card, think first about what type of card you can get with your score, then consider your wants and needs. Compare these features:
- Annual fee. Getting a card with no annual fee is a must to start out, since you’re likely to have this account open for a long time.
- Sign-up bonus
- Rewards (travel miles, cash back, etc.)
- Grace period on interest. If you pay your balance on time and in full, you won’t have to worry about paying interest at all.
Also keep in mind the card’s annual percentage rate, or APR. This establishes the amount of interest you’ll pay each year. You won’t know the exact rate you’ll get ahead of time, since it depends on your credit. Typically, cards will have two or three rates, which will give you a general sense of the range you can expect. You also won’t know your minimum payment; it will typically be calculated based on a percentage of your balance.
The key to choosing any credit card is to read contracts, shop around and ask for advice, says David Wirth, a financial advisor at Savant Capital Management in Rockford, Illinois. He adds: “If you have an older sibling, talk to them. If not, talk to mom and dad. Bounce things off other people before you make a decision.” In addition to consulting some of the more fiscally savvy people in your life, double-check advice with trusted online resources or finance professionals.
Use NerdWallet’s credit card comparison tool to see how different cards measure up.
If possible, pay off your credit card in full each month. Sometimes this might not be possible, so for the sake of your credit score, try to keep your credit utilization ratio below 30% at all times. That’s the amount you owe on your card versus your total limit. Try to pay more than the minimum, including any interest that accrued since your last due date. It’s also crucial to pay your bill on time, every single month.
“Make sure you pay your interest. Every monthly bill has a minimum, but a lot of times it doesn’t cover the interest,” says Guy Baker, a financial advisor with Wealth Team Solutions in Irvine, California. “Your interest might add $47 to your bill and your minimum payment might be only $25. Your balance will go up each month and you’ll owe more money.”
Some experts advocate using your credit card like a debit card and swipe only if you have the money in your account. “The moment it shows up on your online account, pay it off immediately,” says Phil Schuman, director of financial literacy at Indiana University. “Only buy what you can afford to begin with.”
When you make the right moves with your credit card, you’ll be able to build a credit history that will help you qualify for loans down the line when you want them — like when you want to finance a car, purchase a home or start a business.
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