The American Dream: a nice house with a white picket fence, a big porch in the backyard and a flat-screen TV in the living room. In order to buy some of those things, most of us depend on credit. Long before you can get a mortgage for your dream home, however, you need to establish a good credit history. Applying for your first credit card is a good way to get started.
But it's not always easy to get approved for your first credit card, especially when the economy is in a slump. You need to start out with a basic card before you apply for anything labeled "platinum." And we've all heard the horror stories of people trapped in credit card debt and having trouble even making the minimum payments. How can you get your credit started and keep on the right track?
The best way to get on track and stay there is to be informed. Before you shop around for a card, know why you want a card and how much you can afford to spend. Learn the rules of applying for credit, and what questions you need to ask. The language of credit cards, like APR and balance transfer, is especially important, and know what questions you need to ask before you sign up for a program. When you've found a card that you think might be right for you, make sure to read the fine print and know exactly what you're signing up for. Choose your card carefully and never, ever make a spur-of-the-moment decision when it comes to applying.
Once you've educated yourself about credit cards and how they work, you'll be ready to get out there and find just the right one for you.
Rules for Applying for Your First Credit Card
When you apply for your first credit card, there are a few rules you should keep in mind if you want to get your credit off to the right start.
First, just like with any decision in life, make sure you know what your goal is. Are you trying to establish credit? Do you want a card for the convenience of not needing to carry cash around? Do you want to to shop online easily? Are you getting a card so you can buy big-ticket items you usually don't have the money for? Once you have a really clear idea what your goal is, it'll be much easier to decide which card to apply for.
The next rule is important: Make sure you can pay before you apply for a credit card. Some credit card companies will offer cards to nearly anyone, and if you can't make the payments on your credit card, you can wind up in a downward spiral of late fees, skyrocketing interest and other penalties. This can create a sticky trap that's very painful to get out of. Before you apply, sit down and make a list of your income and expenses, and calculate how much you can afford. If your income varies, like a salesperson who works for commission or a server working for tips, keep that in mind and be very conservative when you consider how much you can afford. Calculate your monthly budget based on a lean month, and leave yourself plenty of leeway so you can still make your payments during tough times.
Third, make sure you know exactly what you're signing up for. It may be tempting to sign on the dotted line when you walk past a table in your college quad where a guy is offering free T-shirts to applicants, or to say "What the heck" when the salesclerk at the mall offers you 10 percent off your purchase if you get a department store card. Keep in mind, though, that these enticing offers are designed to get people to make snappy decisions without reading the fine print, and applying for credit is something you should never do on impulse. Leave your impulsive decisions for the candy bar rack at the grocery store checkout lane -- it'll be easier to work the extra calories out of your love handles than it will be to work away ballooning debt with a sky-high interest rate.
Understanding Credit Card Benefits
Lots of credit cards come with special features to attract consumers. These benefits can include cash back, frequent-flier miles and "points" that you can trade in for merchandise.
When you're comparing card benefits, think about your spending patterns and which benefits would be best for you. For example, as of July 2010, the Capital One No Hassle Cash Rewards Card offered 2 percent cash back on groceries and gas, and 1 percent cash back on other purchases [source: CreditCardGuide]. This might sound great to you if you plan to buy lots of gas and groceries with your card. If, on the other hand, you never buy gas or groceries with your card, but you travel a lot, you might prefer a card that offers frequent-flier miles.
Study the details of the card's benefits to see if they're right for you. If the card offers cash back, how often do you get it, and in what form? Once a year by check? Quarterly in the form of a gift card? If the card offers points, what can you get with the points? Can you trade the points in for gift cards you can use anywhere, or do some cards only work at certain places? Can you only trade the points in for merchandise, and is the merchandise anything that you're interested in? How often can you redeem your points? If the card comes with frequent-flier miles, are there restrictions on how you can use them, such as "blackout dates" during certain times of the year?
Make sure you're well informed about exactly what your credit card's benefits can and can't do for you. Most importantly, though, don't let all the extras distract you from the basics: the interest rate and general terms of the credit card agreement. After all, beneath the fancy stuff, you're still signing up for a credit card, which means you're entering into a financial contract.
Understanding Promotional Credit Card Rates
When you apply for a credit card, you might see that it has a promotional interest rate, also called an introductory rate or introductory annual percentage rate (APR). These rates can be pretty terrific -- as low as zero percent -- but make sure that you know everything you need to know about the rate before you sign up for the card. These rates are almost always temporary, and sometimes they only apply to some situations, such as special rates for balances you transfer from other cards that don't apply to purchases. Most credit card companies put the introductory APR at the top of the offer in bold print, while the information about the limitations of the offer is down below in fine print. This is a good time to remember what your parents always said about reading the fine print.
Something else you need to know before you apply for a new card is how long the promotional rate will last. Some last for six months, others for a year or longer. If the promotional rate is for balance transfers, calculate how much you would need to pay each month in order to pay off the balance transfer before the promotional rate runs out.
The third thing you really need to know about a promotional interest rate is what will happen after the promotional term is up. What will the interest rate rise to? This is especially important with "same-as-cash" promotions. If you buy that fully-loaded new laptop you've been coveting on a 12-month, same-as-cash deal, understand what the consequences will be if you don't pay off that laptop in 12 months. In most cases, the rate will jump astonishingly high, and the new rate will also reach back to the date of your purchase. Suddenly, instead of paying no interest on your new toy, you owe 29 percent interest from the day you took it home until the day you pay it off -- a terrible deal in the long run, and a very unpleasant shock when you open your next credit card statement. Many same-as-cash deals will also revert to the sky-high rate if you miss a payment or are late making a payment. Banks are able to offer these same-as-cash deals because they make so much money from the unfortunate souls who don't stick within the strict guidelines of the deal. Bottom line: Never sign up for a same-as-cash deal unless you're sure you can pay it off on time.
Finding the Best Credit Card Interest Rate
A good interest rate is one of the most important things to look for in a credit card. A card with a high interest rate will be more difficult to pay off, and you'll end up paying much more in the long run. For example, if you're carrying a balance of $2,000 on a credit card with an APR of 15 percent, your interest for one month will be $25, but if you carry the same balance on a card with a 25 percent APR, the interest for one month would be $41.67. Just imagine how that difference in interest will add up over months and years [source: Investopedia].
To keep from paying more than you have to, you need to shop around for a good rate. A good guideline to use is the average APR, which you can find pretty easily online [source: Bankrate.com]. Since this rate is the national average, a person with well-established, excellent credit can expect a rate that's a little lower, while someone with a lower credit score or with no established credit will pay a little more.
Remember that not all types of cards are created equal when it comes to interest rates. Department store cards and gas cards often have some of the highest interest rates, while a card you get from your own bank or credit union will probably offer you a lower rate. Your credit card's interest rate is especially important if you'll be carrying a balance on the card. For example, a gas station card with a high interest rate isn't such a big deal if you use it just for convenience and pay in full every month, but a big shopping spree on a high-interest department store card can haunt you for years to come. If you intend to carry a balance on your credit card, shop around for a good rate. Talk to a manager at your bank or credit union, check out the current average APR, and research interest rates online. Your wallet will thank you later.
Tips for Applying For Your First Credit Card
When you're ready to apply for your first credit card, keep in mind that it's not always easy to get your first one. Don't rush out and apply for a platinum card with all the bells and whistles -- you're sure to be turned down, and denials look bad on your credit. You might want to consider applying for a "secured" card -- these cards require you to make an initial deposit before you can use the card, and they're a way for you to establish a good payment history without asking a bank to take a risk by advancing money to someone with no credit. Once you've made regular payments for a year or more, you can apply for a more traditional card.
Another option for establishing your credit is to apply for a department store card or gas card and use the card very carefully. While these cards often have high interest rates, they tend to be easier to get approved for. This allows you to get your foot in the door, as long as you carry only a very small balance. That way you can establish your credit without burying yourself in debt. Once you've built a good credit history, you can apply for a regular bank credit card, and a good place to start is at the bank where you have your checking or savings account.
While shopping for the right credit card, apply for one card at a time, and wait a few months between applications [source: Bankrate.com]. Every time you apply for credit, it leaves a record on your credit report, and banks are wary of someone who applies for lots of credit all at once. If you're accepted for a credit card, wait a few months before you think about applying for a second card. Remember that one or two cards is plenty -- having too many cards makes it easier to get into financial trouble, and banks also shy away from someone with too many accounts.
Once you have your first credit card, use it regularly and make all of your payments on time. Don't "max out" the card, but make regular small purchases so that you can establish a good payment history [source: Bucci]. That will put you well on your way to building strong credit.
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- Bankrate.com. "Getting Your First Credit Card." (June 29, 2010) http://www.bankrate.com/finance/credit-cards/getting-your-first-credit-card.aspx
- Bankrate.com. "National Credit Card Rates for July 1, 2010." (July 1, 2010) http://www.bankrate.com/finance/credit-cards/national-credit-card-rates-for-july-1-2010.aspx
- Bankrate.com. "Key Questions to Ask Before Signing Up." May 1, 2006. (July 1, 2010) http://www.bankrate.com/brm/green/cc/cc8.asp
- Bucci, Steve. "How to Build Credit for the First Time." Bankrate.com. Nov. 8, 2002. (July 1, 2010) http://www.bankrate.com/brm/news/debt/20021108a.asp
- CreditCardGuide."Credit Cards with Cash Back." (July 1, 2010) http://www.creditcardguide.com/cashback.html
- Investopedia. "Understanding Credit Card Interest." (June 30, 2010) http://www.investopedia.com/articles/01/061301.asp