8 Things Everyone Should Know About Their First Credit Card
Having your own credit card is a big first step towards becoming a financially independent adult. But what many don’t realize is that how you manage a credit card goes beyond what you choose to purchase. For banks and other creditors, it’s a measure of your trustworthiness and using it responsibly is an important first step toward building your credit rating.
It may not seem important now, but if you’re looking to rent an apartment, your landlord is likely to be looking at your credit score. Want to buy a car? The dealership will want to check your credit rating, and so will the insurance company. Looking to buy your own home? Your credit score can significantly impact whether you can qualify for a home mortgage and what your interest rate could be.
So, before you sign up for your first credit card, here are eight things you should always remember:
1. Pick the Right Card
Credit card companies advertise everywhere. In 2015 alone, banks and credit card companies spent almost $1 billion in advertising. This includes everything from commercials with Jennifer Garner, to online promotions through sites like CreditKarma.com, to the countless letters that consumers receive with offers of low-interest credit cards with great rewards programs.
The good news is that there are plenty of options, that is why you shouldn’t just sign up for any card. Take the time to comparison shop and find the card that is best for you.
2. Take an Interest in Your Credit Card Interest Rate
Many credit cards will offer you a zero percent introductory rate when you sign up. However, that rate is only temporary. Once the introductory period is over, you may find yourself paying 15 percent, 18 percent, or more, in interest.
Zero percent introductory rates are good if you plan to pay off your debt in the short term, however, in the long term, it may be in your best interest to look for a card with a lower interest rate that remains stable over time.
Also, keep in mind that your interest rate can go up over time and if you miss payments, the credit card company may be allowed to raise your interest rate even more.
3. Spend Wisely
When you have a credit card, it’s tempting to use it to buy things you couldn’t afford before. However, credit cards should be reserved for important purchases, and occasionally for emergencies. If you’re using your credit card for day to day purchases, make sure you’re able to pay those off each month, or else you’ll essentially be paying more for every item. If you find yourself in this situation, you may want to look at your overall spending habits and look for ways to budget and save.
4. Don’t Test Your Limits: Understand Your Credit Limit
When you get a credit card and see that you have a credit limit of thousands of dollars, it’s easy to get seduced by the power of high balances. In fact, the more you use your credit card, the more likely that the company will raise your limit. They want you to carry a balance because this allows them to charge more in interest and fees each month.
However, in addition to the high cost of interest, how you use your credit card can also affect your credit score. Credit card companies are usually okay with you using up to 20 or 30 percent of your credit limit. But if you carry a higher balance, your credit score will take a hit.
4. Master Your Minimums
When you receive your credit card statement each month, the first number that you’re likely to see is your monthly minimum. This is the minimum amount that you are required to pay each month to keep your account current. However, the monthly minimum doesn’t exclusively go toward paying down your balance. It usually includes a purchase interest charge, which is a fee that the credit card company is charging you for carrying a balance. On average, less than half of the monthly minimum actually goes toward paying down your balance.
Even if you stopped using a card, if you only paid the monthly minimum, you could easily spend 20 years paying down your balance, and often you will pay as much in interest as you originally owed. Instead, budget wisely and pay as much as you can toward your credit card each month.
5. Know Your Credit Card Fees
Does your credit card have an annual fee? A monthly service charge? A rewards program fee? Before you commit to a card, make sure you know what you’ll be paying in fees each year, and make sure that you factor it into your spending plans.
6. Be Wise About Rewards Programs
Credit cards sell themselves on their rewards programs: frequent flyer miles, bonus cash, cash back, members-only experiences. These can be a great reason to sign up for a particular credit card.
However, many of these programs charge an annual fee and have complex rules and conditions that affect your ability to take advantage of the rewards. Before you invest in a rewards program, ask yourself if you’ll really be able to take advantage of it. If you aren’t, you may be wasting money.
7. Don’t Be Late – Automate Credit Card Payments
Credit card companies can and will penalize you if you’re late with your credit card payments. That’s why it’s important to make sure that you pay on time. The good news is that your credit card company will often let you select which day of the month that your payment is due. That way you can make sure that your payment will be due after you receive your paycheck.
Want to make sure that you make your payment? Set up an automatic payment from your checking account each month, that way you don’t have to worry about missing a payment. Just make sure that you keep an eye on your balance.
8. Don’t Do It Alone
Signing up for your first credit card can be a big decision, so don’t be afraid to do your homework and ask for help. Try doing your research and find a few options that you feel best fit your lifestyle.
Looking for more advice? Come talk with us today! We can help you to find the credit card that’s right for you!