A Guide to Your First Credit Card

Credit card TV commercials lead us to believe every credit card and everything about using a credit card is awesome. Credit card have their bright sides. Credit cards are convenient for traveling, reservations, online shopping and purchases when you don’t have cash on hand. But credit cards have dark sides too. It’s easy to over-spend with a credit card, which leads to an inability to repay the balance before interest begins adding up.

Some credit card offers are great. But some credit card offers are bad deals. For example, some cards have high interest rates — 20 percent or more is common — and others promise fantastic cash-back rewards that are difficult to earn and redeem.

It’s easy for a first-time credit card user to get lost in the thousands of offers available today. That’s why experts recommend first-time credit card users pick cards with a low interest rate. Avoid rewards cards that offer points, cash-back, hotel nights, or airlines miles because these types of cards come at the cost of high interest rates, and can be tricky to redeem.

This page breaks down the types of cards available, and helps guide you towards the card that will fit your spending and goals best.

Credit Cards By The Numbers

1 out of 2

Student credit card users applied for their cards in-person at banks where they already had checking or savings accounts.

56%

Students who obtained their first credit cards before starting college

1 out of 4

Student credit card users applied for their cards via the internet or telephone

$171

Average monthly credit card charges for students in 2013

Source: Student Monitor 2013

How to Beat Banks at the Credit Card Game

Credit card issuers lend you money with the intention of making a profit. Today, the cost for banks to lend you money, or cost of funds, is almost nothing. The average interest rate on credit cards varies from 15 to 18 percent, with default rates as high as 30 percent. Not only are banks making money on interest charges, they also profit from late fees, excess balance fees, and the transaction fees merchants must pay whenever a card is used.

The trick to winning the credit card game is to avoid the card issuer’s fees and interest charges. An ideal first credit card would have a low interest rate with a low to average limit ($500-$2,000), so credit can be built conservatively. Once the card user has established a history of being responsible by making payments on time or paying the balance off every month, the issuer may decide to raise the credit limit. This could encourage more spending on higher-priced items. Don’t let this trap you into taking on a large debt balance for which you can only afford the minimum payment. Use credit only when absolutely necessary. If you treat it as an addition to monthly income, it could spiral out of control.

Rewards or Low Interest?

There are two types of cards: one that offers incentives for using it, and one that offers no-nonsense low rates. Credit unions tend to offer the latter.

Rewards cards tend to have higher interest rates. About half of all credit cards issued today offer some type of “reward” as an incentive. These rewards include airline miles and/or hotel points, which accumulate through card usage and can be used toward future flights or stays. There also are cash-back cards, which offer cash rewards based on spending amounts, such as earning back a percentage of what you spend; typically these rewards range anywhere from 1 to 5 percent cash back or a flat amount once you’ve hit a certain level of spending. Other cards offer a combination of rewards, including cash back, gift cards, merchandise or entertainment. Be sure the rewards are worth what’s being charged in interest, as well as annual or other fees. Rewards cards are best for people who pay off their balances every month.

Low-interest credit cards are no-frills cards with low rates and low or no annual fees. These are good credit cards for people who tend to carry balances. A low interest rate means you pay less toward interest and more toward paying off the balance. Some issuers offer low- or zero-percent introductory rates. However, watch for cards whose rates spike after the specified introductory period. In addition, even low-interest cards can turn into high-interest cards when users make late payments or break certain terms of use that activate the default rate. In most cases, though, first-time users should seek these types of credit cards to build credit. Until it’s determined that you can keep shopping binges under control, a low-interest, low limit credit card is best for establishing a clean history and, in turn, a high credit score.

What Credit-Card Issuers Look For

Issu
Stable Income

Any card issuer wants assurance that the cardholder is responsible enough to pay back any credit used. This includes a steady job or stable source of income. More than one or two jobs within a year’s time could be a red flag to credit-card issuers.

Low Debt Obligations

The less debt on a credit report, the better. Financial institutions don’t like to see a lot of debt obligation. This means they may have to compete with other bills to get paid. Keep your income-to-debt ratio as low as possible.

Acceptable Credit History

An acceptable credit history means no, or very few, late payments, ideally. One or two late payments with explanation might be overlooked, but generally they are frowned upon. Issuers will review each credit report to look for derogatory comments.

Why Your Credit Score Matters

Ninety percent of lenders look at a credit score when determining whether to approve a loan. Credit score software analyzes your credit history and creates a three-digit number that predicts the chances you will repay a loan. The higher your number, the lower risk you are as a borrower. Most lenders use FICO credit scores.

Maintaining a high credit score is important for obtaining credit at low interest rates. High FICO-score holders get approved more quickly and have more credit offered, often at better rates than those offered to at-risk borrowers.

First-time cardholders can help build up their credit scores by making at least the minimum payments on time every month there is a balance. Payment history makes up 35 percent of a FICO score. Missing payments will decrease a score, while an on-time payment record will raise it.

Lenders also look at the amount of open credit and how much of it has been used as part of their approval process. Keep balances at no more than 30 percent of the maximum limit. For example, if the limit is $1,000, you would ideally use no more than $300. Amounts owed, in relation to available credit, comprise 30 percent of a FICO score.

The balance of determining factors for a FICO score is 10 percent new accounts opened, 15 percent length of credit history, and 10 percent the credit mix.

Low FICO scores result from not making timely payments or missing a payment, opening too many accounts and/or maxing out the credit cards. Don’t open a credit card unless it’s necessary. Keep the balances low in relation to the maximum limit, and pay off the entire balance every time you can. Or at least pay as much as possible at the end of the month.

Why Am I Getting So Many Credit-Card Offers?

An approval for a credit card can cause an avalanche of offers from other credit-card issuers. This is because credit-reporting agencies sell customer data to banks and other lenders. Lenders send out mass mailings to those who are “pre-screened” or appear to be good applicants based on credit scores and history. In any given month, there could be as many as 242 million offers going out to potential credit-card applicants. Once a consumer applies for credit, that person is on the radar for any institution that lends credit or money.

According to the Federal Trade Commission, you can stop these solicitations by phone at 888-5-OPTOUT (888-567-8688) or online at OptOutPrescreen.com.

Once you open your first credit card, keep it open for as long as possible. Why? Part of your credit score is based on the average age of your accounts. The older your accounts, the higher your credit score will tend to be.

First Credit Card Questions & Answers

Terry Savage is a nationally recognized expert on personal finance, the economy and the markets. She writes a twice-weekly personal finance column syndicated nationally by Chicago Tribune Content Agency, and blogs regularly on the Huffington Post. Terry appears weekly on the WGN radio Noon Business Hour and on WGN-TV Morning News, as well as national television and radio programs, commenting on the financial markets and current economic events.

Terry is the author of four best-selling books on personal finance. “The Savage Truth on Money” was named one of the top ten money books of the year by Amazon.com in its first edition. Her other recent book is, “The Savage Number: How Much Money do You Really Need to Retire?”

terry

There are two basic classes of credit cards—rewards and no rewards. Of course, the industry breaks these down into finer categories. Which type of credit card would you recommend for someone who hasn’t had a card before?

If someone hasn’t had a card before, it may be difficult to get that first card. If that’s the situation, I suggest searching for a secured credit card. It’s a standard Visa or MasterCard, but your credit limit is the amount of money you deposit into a very low-interest savings account at the bank. Use it a few times a month, pay it in full and on time and suddenly you’ll be deluged with card offers! Then choose a card that has the lowest annual fee — great if it offers rewards you want to use. Unless you’re charging a lot of money and paying in full and on time, those rewards incentives won’t amount to much.

What are the biggest mistakes you see first-time credit-card holders make when they get their cards?

First-time card holders often believe that because they are granted a “line of credit” of $5,000 or $7,500, it means they should go out and spend that amount! Nothing could be further from the truth. Use the card sparingly because you will be surprised at how those small purchases can add up at the end of the month. Make sure you can access your card balance online, either at your bank website or at the card issuer’s website. That will help you keep track of your balance. Checking at least weekly is a good idea, so you can catch any unauthorized use of your card. (You’re protected against fraud but must report it promptly.)

Be sure to pay the entire bill, not just the “minimum required payment” every month. Paying only the minimum could take you as long as 30 years to pay off the balance and a fortune in interest. I’d say that’s the biggest mistake people make — thinking that as long as you’re paying the minimum, you’re OK with your credit. In reality, you’re about to be buried in debt.

How many credit cards should a person have?

You probably don’t need more than one or two credit cards. Use one for deductible business expenses or for expenses that your company will reimburse. Keep the other for personal expenses. That will make things easier when it comes to tax time as well.

Do you think rewards cards are a smart choice for someone new to credit cards?

Rewards cards are a good idea, as long as you’re not fooling yourself into thinking you’re getting something for nothing. If you aren’t careful about paying in full and on time, the interest and penalties could dwarf potential rewards. If you’re trying to pile up the rewards, you can have monthly bills, like your cell phone, automatically charged to that credit card, building up rewards. But that only works if you have the money to pay the bill in full.

What advice do you give to someone who can’t afford to make a credit-card payment?

First, here’s the secret formula to paying down credit card debt: Take the current monthly payment and double it. Post that amount on your checkbook cover or on a Post-it on your computer screen. Pay that same amount every month and don’t charge another penny; your card will be paid off in less than three years. But if you’re falling behind and can’t even pay the minimums, you need help.

Don’t fall for credit “repair” rip-offs. Instead, contact the National Foundation for Credit Counseling at 800-388-2227. That number will connect you to the nearest local office. You can trust these non-profit member organizations. They’ll help you work out a budget or, if necessary, contact your creditors to negotiate lower rates and waive late fees, as well as set you up on a payment plan.

Are there things a person should or shouldn’t buy with a credit card?

Buy anything you can afford to pay off at the end of the month, or use it for emergencies, with a plan to pay it off within a maximum of six months.

*This interview has been edited for clarity and space.

What to Do if Your Credit Card Application Is Denied

Review the reasons why the lender denied your application. Typical reasons credit is denied include:

  • Income
  • No or poor credit history
  • Too much debt relative to your income

Under the Equal Credit Opportunity Act (ECOA), lenders must give applicants the reasons for denying their applications. Lenders are required to provide applicants with credit scores used in making their determinations and the key factors that affect the credit scores. In addition, issuers are required to reveal which credit-reporting companies they’ve used and inform applicants that they have the right to get a free copy of their report.

If you are denied due to low income, don’t forget to add other sources of income besides your basic paycheck. Money earned from side work, child support, alimony, overtime pay and a spouse’s income can count. A 2013 amendment to the CARD Act allows non-working spouses to use partner income on credit-card applications as long as they have “reasonable access” to the funds.

If denial is due to no or minimal credit history, try applying for a secured credit card to begin establishing credit. If it’s because of a bad credit history, take care in the next six to 12 months to make timely payments and pay down as much debt as you can and reapply. You might just need to shop around for a card that is better suited for your financial or credit situation.

Don’t forget, the rules for qualifying vary by lending institution, so while one issuer may find your income or credit score too low to qualify, another issuer might find your income and/or score sufficient.

Finally, consider finding a co-signer to help get credit established.

Focus on the Issues Harming Your Application

The Federal Trade Commission reports that 1 in 5 consumers have “confirmed material error” on their credit reports that will cause them to pay more in interest than they should.

According to the FTC, to ensure mistakes are corrected as quickly as possible, contact both the credit bureau and organization that provided the erroneous information to the bureau. Both these parties are responsible for correcting inaccurate or incomplete information in your report under the Fair Credit Reporting Act.

Provide any proof that supports your claim that an error exists to the credit bureau and the business who made the report in question. Send the documentation with your complete name and address information. Explain the situation and request a copy of any resulting correspondence between the business and the credit bureau. The FTC says the process takes between 30 and 90 days.

Pay off any existing debt to lower your debt-to-income ratio. Clean up any outstanding balances possible. Be sure you report your income information accurately on credit-card applications.

Consider a joint credit card where both contract signers have liability for the loan. This can be a temporary arrangement. Once you’ve proven to be a responsible credit user and make timely payments, chances are the next credit card you apply for on your own will be approved.

Consider Adding a Co-Signer

It may be necessary for a credit applicant to have a co-signer in order to be approved for a credit card if he or she has little to no stable income, no or bad credit history or excessive amounts of debt. A co-signer is essentially agreeing to take responsibility for ensuring payment if the payments can’t be made by the applicant. When the applicant has no or little credit history, the card issuer wants to know that if the applicant were to default, the co-signer, who has a good credit history, will step in to make the payments.

Co-signers are just as liable for the debt as the applicant, and any credit reporting on the account is made on both signers of the credit card, so both credit reports are affected. Try getting approved alone. If you’re denied, ask someone to co-sign. Once you have established credit for a year or so, you can then try to get credit in your name alone.

12 Things You Should Do With Your Credit Cards

Make your payments on time.

Pay as much as possible every month and more than the minimum payment.

Stop using your card when you can’t pay your entire balance repeatedly.

Shop for a credit card — don’t blindly accept the next offer arriving in your mailbox.

Restrict your credit-card use to emergencies if you can’t control your spending.

Keep your credit use to less than half of your available balance.

Use one credit card unless you have good reasons to use more than one.

Compare your credit-card statements to your receipts to be sure they match.

Contact your credit-card issuer directly if anyone calls or emails asking for personal or account information.

Store your account information, including passwords and account numbers, in a safe place.

Report a lost or stolen credit card to your card issuer immediately.

Know your due dates and terms that can raise your interest rate, such as missing a payment.

12 Things You Shouldn’t Do With Your Credit Cards

Apply for a credit card on impulse just to get a free gift or discount.

Use your credit card for impulse purchases — carry cash for unplanned purchases.

Max out your credit card, which will damage your credit score.

Transfer balances from one account to another repeatedly.

Share your credit card with friends and family.

Panic if you find yourself in financial distress and cannot afford to make even a minimum payment.

File for bankruptcy or sign a contract with a credit-counseling agency or debt-settlement company without understanding all of your options and the long-term costs and benefits of each option.

Close your oldest credit-card account without understanding how it may harm your credit score.

Open a rewards-type credit card without understanding how to earn and redeem your points.

Co-sign a credit-card application without understanding the liability and credit-score implications for doing so.

Get a cash-advance using your credit card.

Let a credit card languish unused for long periods of time.

Student Credit Cards at a Glance

Special rules apply if you’re between the ages of 18 and 21 or the parent of someone in that age range.

The Credit CARD Act of 2009 limits how credit-card companies can solicit to people younger than 21, and it requires parents to co-sign for dependent students.

The law was intended to curb skyrocketing credit-card balances among college students, who were the targets of aggressive marketing campaigns by credit-card companies. The law is a success. A recent GAO study found student credit-card use has fallen. Today, students with credit cards spend an average of $171 a month, but nearly 3 out of 4 pay off their balances every month. Only about 1 in 10 students make the minimum payments.

Because the law requires co-signers for dependent students, the co-signer (usually a parent) acts as a spending throttle and financial coach to a spendthrift student. If the co-signer doesn’t rein in the student, the co-signer assumes the risk of repaying a balance. Late or missed payments are reported on both the student’s and the co-signer’s credit reports. Even worse, the co-signer has liability for the debt.

Glossary: Key Terms to Know Before Applying For a Credit Card

Annual Fee

Some credit-card issuers charge yearly fees to extend you credit. Some waive fees for the first year, and not all companies charge annual fees. Annual fees generally are non-refundable even if you close the account within a year’s time.

Annual Percentage Rate (APR)

The APR is the interest rate charged on credit-card balances carried monthly. It is usually reflective of the applicant’s credit history and score. Applicants with low credit scores may be charged higher APRs.

Balance Transfer Fee

An issuer may assess a fee when you transfer an outstanding balance from one credit card to another. The fee typically is based on the amount of the transfer and/or is a flat fee per transaction.

Cash-Advance Fee

When your credit card is used to get cash, a fee is imposed based on the amount withdrawn and/or a flat fee per advance. Interest rates generally are higher on cash advances than credit-card purchases.

Credit Limit Increase Fee

Some issuers might charge fees to increase your credit limit

Finance Charge

The monthly charge calculated on the outstanding balance carried beyond the grace period. It is accumulating interest on purchases — the cost of using credit!

Grace Period

According to the Credit CARD Act of 2009, a grace period must be at least 21 days; it is the time during which you are allowed to pay your credit-card balance without having to pay any accrued interest.

Late Payment Fee

The fee assessed for a credit-card payment received after the due date. This usually is a flat fee but could depend on the outstanding balance.

Over-the-Credit-Limit Fee

The fee assessed for purchases in excess of your credit limit. This usually is a flat fee.

Transaction Fees and Other Charges

Fees of varying amounts that are assessed if you use the card to take a cash advance, fail to make a payment on time, exceed your credit limit, use the card in a foreign country (foreign exchange fees), request archived statements, etc.

Additional Resources for First-Time Credit Card Applicants

FTC Credit and Loans page

The Federal Trade Commission (FTC) offers tips to help you choose a credit card, create a budget, and learn more about your credit score. The FTC is responsible for “prevent(ing) fraudulent, deceptive and unfair business practices in the marketplace.”

FTC Coping With Debt page

The FTC’s advice on setting realistic budgeting and other techniques, debt relief services such as credit counseling or debt settlement, debt consolidation, and bankruptcy.

CFPB Know Before You Owe Credit Cards page

The Consumer Financial Protection Bureau (CFPB) published a model credit card agreement, collects and publishes data on credit card complaints, and surveys credit card plans. Let the CFPB know when you have complaint about your credit card issuer.

Federal Reserve’s 5 Tips on Getting the Most From Your Credit Card

The Federal Reserve suggests dos and don’ts to manage your credit card account. Paying on time is the smartest thing a credit card holder can do.

FTC Using a Credit Card page

The FTC outlines credit card users’ rights and responsibilities under the law. Learn security tips, how to get a refund, and when to dispute charges.