Exploring Your First Credit Card: Steps and Considerations for Beginners
Credit cards can be really useful financial tools. They can help you build or repair your credit, making it easier to get loans with better rates. They also offer protection when traveling and against fraud, and you can earn rewards points or miles.
If you don’t have a credit card, you’re not alone. A recent study by Upgraded Points found that 28.5% of Americans don’t have one.
However, if you decide to get a credit card, there are some risks to be aware of. It’s easy to accumulate debt with a credit card, and with high interest rates, this can become very costly if you don’t pay off your balance right away. As of April 8, 2024, the average interest rate for a credit card in America is 24.66%, the highest since LendingTree started tracking rates monthly in 2019. Therefore, it’s important to understand some basic principles of using a credit card.
A credit card is a convenience for payment, not a license to spend. It’s essentially a loan. The credit card issuer provides a grace period, and if you pay back what you charged in full by the due date each month, you don’t have to pay interest. If you don’t pay in full by that time, substantial interest starts accruing.
Here are some steps to take as a first-time credit card user to ensure you are disciplined and responsible:
1. **Review Your Credit History**: The first step is to find out if you already have a credit history and review your current credit reports. Even if you’ve never had a credit card, you might have a credit report if you’ve ever paid any bill. The information on credit reports is used to generate credit scores, so it’s important to make sure the information is correct. The three major credit reporting agencies—Equifax, Experian, and TransUnion—provide a free credit report once a week at AnnualCreditReport.com. If you find any errors, correct them by following the directions on each agency’s website.
2. **Determine What You Need the Card For**: Knowing what you plan to use a credit card for, whether it’s for discretionary expenses or travel, can help guide you toward the right card for your needs. There are excellent cards available without annual fees, and it’s generally best to avoid cards with those fees. No-annual-fee cashback cards, where you receive a percentage back of your actual expenditures each month in cash, are usually smart options.
3. **Get a Secured Credit Card**: For people with little to no credit, secured credit cards are a good option. These cards require you to deposit money with the card issuer, which becomes your credit limit. For example, if you deposit $500, your credit limit is $500. Secured cards work just like traditional credit cards. You’ll get a statement at the end of the month, and if you pay the balance in full and on time, you’ll establish yourself as a good credit risk. It’s like a credit card with training wheels.