Looking for your first credit card? It's important to do your research to find the one that best fits your spending habits, lifestyle, and broader financial plan. If you find yourself facing information overload as you look into your options, fear not. Here are the answers to five common credit card questions to help you as you search.
A credit card allows you to spend money on credit up to an agreed limit. Each month, you will receive an itemized statement of your spending, and you have a set period to pay off the balance. After this point, you will typically be charged interest (at a rate that is pre-agreed) until the balance is cleared.
One of the advantages of using a credit card is that the credit card company may offer security benefits to cardholders, such as protection against unauthorized charges, in case you are the victim of fraud. Many credit cards are now chip-enabled, which helps to decrease fraud by turning card holder information into a unique code through an embedded microchip, making it more difficult to duplicate.
Even if you're already familiar with credit cards and how they work, there may be other credit terms that might be helpful as your choose which card is right for you. Check out 9 Credit Terms That Will Help to Increase Your Financial Knowledge for more helpful information.
A good starting point is to ask yourself: "Why do I need a credit card?" It may simply suit your lifestyle and spending habits, or maybe you want to use it for everyday spending, a one-off large expense, or to keep in case of emergencies. You could also use it to earn rewards on purchases you would have made anyway — some cards reward your spending with points that can be redeemed for travel, event tickets, merchandise, gift cards, and sometimes even cash back. Other cards may offer benefits such as travel insurance or purchase protection, which refunds you the difference if you buy an item and the price drops soon afterward.
In addition to considering the features of a credit card and how you plan to use it, you also need to know the fees involved. The cost of borrowing using a credit card, expressed as a yearly rate, is usually shown as the annual percentage rate (APR), which is a figure that can help you compare the cost of different credit cards. Some cards will also have an annual fee, or there may be charges for things like taking a cash advance on your credit card. It's crucial to understand all of these charges so you can make better financial decisions around the way you use your credit card.
When evaluating different credit card options, the APR might be less of a consideration if you plan to pay off the full balance every month. If this isn't the case, however, then it might make sense to apply for a card with a low interest rate. If a promotional interest rate is offered, be sure to make a note of when it expires in order to be prepared for any rate increases that will affect your balance once the promotion period ends.
Once you've worked out what your priorities are, compare your options. This will help you analyze the range of credit cards available, highlighting the similarities and differences of each. Some credit card providers will be able to tell you if you are pre-qualified for their cards by checking a few of your personal details. This means you'll know if you could be more likely (but not guaranteed) to be accepted for a particular card before you apply. When you decide which suits you best, you can most likely apply for your first credit card online. The basic information you will need to provide with your credit card application is your name, birth date, address, social security number, and annual income, but this may vary with each provider.
Interested in applying for your first credit card, but don't have a credit history? Consider applying for a secured card, an alternative to a traditional credit card that allows you to put down a deposit and get a line of credit, usually the same amount as your deposit. A secured card can be a good way to start to establish credit for those with little or no credit history — and if you pay your monthly amounts on time, the card issuer may convert your card to an unsecured one. For more tips on how to responsibly build credit, check out How to Start Building Credit With No Credit History.
There is no definitive answer to the question of how many credit cards you should have, and you could choose to use separate cards for different purposes. For example, if you're looking to benefit from rewards offers and plan to pay off your balance every month, you may wish to use a rewards credit card that offers you points for everyday spending. A card with a lower interest rate, meanwhile, could appeal to someone planning to make a big purchase who would prefer to pay the balance off over a period of time.
What's right for you will depend on your individual circumstances. The most important thing is to keep track of your cards, remain mindful of your spending, and have a payment plan in place so you're always informed and in control.
Your personal credit score and history are essentially a record of your behavior as a borrower. It shows other lenders how you manage your credit cards as well as any other accounts you may have. A healthy credit history is important because it could potentially affect your future financial plans and whether you can get credit in the future at competitive rates. Having a credit card and handling it properly can help you build a healthy credit record. You can do this by paying your bill on time each month and staying within your agreed credit limit, demonstrating that you are a reliable borrower. For more tips on establishing credit, see How to Help Build Credit.