So you’re thinking about getting your first credit card. It’s a big first step towards adult financial responsibility. Now, when getting your first credit card, let’s not take the word “responsibility” lightly. Having a credit card is truly a responsibility and comes with a number of important things to always keep in mind. Mismanaging your credit card usage now, even when you’re just beginning, can and will really hurt you later in life.
And not that much later. If you’re getting your credit card in your 20s, a credit card hit will affect you sooner than you think. For example, when you want to purchase your first new car perhaps not soon after you graduate, a poor credit score will significantly raise the interest rate of a loan. Or, if you’ve racked up credit card debt, you might have to try balancing that debt along with student loans while living on your own budget. All of these scenarios could make your life tough before you’re even 30.
But don’t let this scare you or deter you from getting a credit card. Credit cards can be a very useful financial tool and can really help you manage your monthly budgets and cash flows. As long as you don’t overspend and budget properly, a credit card is something one should even consider getting earlier rather than later. It’s one of the simplest tools one can get to begin building a credit profile. So the earlier you get a credit card, the more time you’ll have to build a history of proper usage.
Even if you are a bit behind the curve now though, it’s okay! You can still start and catch up over a little bit of time. Check out these tips on how to get your first credit card and you’ll be on the right track towards financial adulthood.
Consider getting a student credit card as your first credit card
Student credit cards were specifically designed to help younger people begin building their credit and may be your ideal option. You can apply for one of these with either limited or even no credit history and will have a very decent chance of approval. A student credit card will very likely come with a low credit limit (generally less than $2,000 a month), but will function just like any other credit card and many even come with perks and rewards such as cash back.
Almost all student credit cards will have no annual fees, which is good as you might not yet have a stable income. Student credit cards generally have high interest rates, but don’t worry too much about this as when you’re getting your first credit card, you won’t want to be spending so much on credit you need to revolve your account. Meaning you shouldn’t have to carry a balance on the credit card from month to month, and should simply pay it all off once the bill comes. If you pay off your account each month, you’ll never have to pay interest!
Get a co-signer
When you apply for your first credit card, consider having a co-signer with you. A co-signer is any creditworthy individual (often parents, a close family member, or close friend), who can take legal payment obligation of your debts should you happen to default. This person acts as an assurance to the lender that your debts will be paid. Having a co-signer with a good credit history greatly increases your chances of being approved for your first credit card.
A co-signer will also have to qualify for any specific requirements of the lender, but once approved, will also be liable for any repayments on your credit card, even if they don’t use it. Defaulting on your credit card will not only negatively impact your credit profile, but also theirs. So be responsible with your credit card usage and don’t burn any bridges.
Parents, if you do trust your child to be responsible with a credit card, it could benefit them to co-sign if you are creditworthy. Again, as noted before, having your child start building a credit history early will help them when they are on their own looking to purchase a car, a home, or apply for any other loan. They will already have built a solid credit foundation and might not have to potentially delay any of these life steps due to lack of credit and/or getting higher interest rates.
Consider getting a store credit card
In some cases, store credit cards aren’t as good of a deal as getting a real credit card. Yes, they may provide a decent discount on your first purchase, but often times the rewards that come later are inferior, interest rates are high, and the card is limited to a specific retailer. But, store credit cards are still an easy way to begin building credit as these are some of the easiest credit cards you can get and qualify for.
Pick a retailer that you would potentially frequent so you will be able to charge your credit card and begin building a history of proper use. Don’t spend excessively with the card, just a small amount each month so there is action that will be reported to the credit bureaus.
Gas reward cards can also be a good first credit card
Gas reward cards are very similar to store credit cards, offering similar mediocre rewards and interest rates compared to general purpose credit cards, only they are limited to specific gas station brands. And like store retailer cards, they are pretty easy to apply and qualify for with little credit history. But unlike a retail purchase, gas may be a more common expenditure in your monthly budget if you drive. Choose a gas station that’s part of your normal routine, such as something close to where you live or work, then see if they have a branded gas credit card.
Stick to the 10 percent rule
Your first credit card likely won’t have a high spending limit, but should serve a couple purposes. One, to teach you how to properly budget and manage borrowing. And two, to begin building a credit history and solid credit score early on. One of the factors that affects your credit score is utilization rate, or how much of your available credit you use each month.
Those with the best credit scores generally have a utilization rate under 10 percent, so set that as your goal for every month. If your first credit card has a $1,000 limit, don’t put more than $100 on it before the end of the month. You definitely do not want to exceed 30 percent of your credit limit each month. Exceeding that amount could actually have a small negative impact on your credit score. You’ll want to follow this 10 percent rule for all your credit cards now and in the future.
When you’re first starting out with a credit card, it may be best to only put a few transactions on the card each month, such as some gas or one or two small meals. Use your first credit card as a supplement to your cash and debit card transactions until you are either comfortable budgeting with a credit card or have more credit available to you. When budgeting, make sure you’ll have enough money at the end of the month after your normal cash and debit expenditures to also fully pay off your credit card balance!
You will want to use your credit card at least a little each month. In order to establish credit history, you have to build documentation of using credit and paying it back. Unfortunately, not using credit does not prove you are creditworthy. Think of your credit report as a financial résumé for creditors to know your experience. For more detailed breakdown of how credit works, take a look at our Ultimate Credit Score Survival Guide.
Don’t close your first credit card
After using your first credit card for a couple years and establishing some credit history, you might feel it’s time to get another credit card, one with a higher limit or better rewards. And that may be a smart idea as an added card will increase your total available credit, and reduce your utilization ratio in turn, both of which will positively affect your credit score. Plus the added benefits of better rewards and perks can help you save more money.
But, if you’re going to get a new card, don’t close your first card! The reason is because the average age of your credit accounts is a factor to your credit score. By closing your first credit card, and oldest credit account, you’ll reduce the average age of your accounts. In addition to that, you won’t be able to capitalize on a higher increased total credit limit and lower utilization ratio. Keep the old credit card open, even if you don’t use it. It won’t help your credit score, but it won’t hurt it, either. Take it out of your wallet and put it in a safe place you’ll remember. Don’t close the account until you have enough other older accounts to balance out any significant impact of closing it.
Credit cards in general are much easier to access and qualify compared to roughly 20 years ago. Once you have yourself established with a card, remember to stay on top of your spending and payments. Being responsible is mostly just common sense. Use your credit card wisely and you’ll be taking a good step towards adulthood!