I remember when I got my first credit card. I was 18 and still a senior in high school. Rather than shopping around for the best credit card offer, I simply filled out an application at the same bank my checking and savings accounts were located, KeyBank (sidenote: I stopped banking with them long ago).
To call my first card “basic” would be an understatement. This thing had no rewards and a measly credit limit of $500, which wasn’t even enough to cover my monthly purchases. I always paid my statement balance in full so I never incurred interest or had any debt on it – but still – it was a bad choice (I will explain why in a moment).
Knowing what I know now, if I were to apply for my first credit card all over again, I would definitely do it different. If you’re currently in that boat, here are 10 tips I have for you.
#1. Unsecured vs. secured… what’s best for your spending habits?
I was always a saver, so for my personally, there was never a temptation to use my card recklessly. But what if you’re not like that? What if you can see yourself getting into debt?
Be honest with yourself. If you think there’s even a remote possibility you will spend too much, then you should definitely avoid getting an unsecured credit card. At least for the first year or two.
Instead, my advice would be to apply for a good secured credit card. With these, you will not be able to spend more than your security deposit, making them a perfect approach for testing the waters.
#2. Your local bank might not be the best idea
As mentioned, I made the mistake of just applying at my regular bank, rather than seeing what else was out there.
Tip: Many small/regional banks actually have their credit cards managed by someone else. For example, my first credit card from KeyBank was actually managed/issued by Citibank (though it was still branded as KeyBank). So there was no advantage in me applying through KeyBank, because they were not the one managing my card account or making the credit decisions.
Instead – for my needs – I would have been better off applying for a card from an issuer like Discover. Why? Because then I could have gotten a nice starter card with great rewards and benefits (something that wasn’t available thru KeyBank). The Discover card for students that gives 5% rewards would be a current example.
Not every small/regional bank outsources their credit card business, but many do. So investigate that before you apply for their card. Your local bank considers you a captive audience and for that reason, they might not be inclined to be competitive with what they offer.
#3. Beware of your credit utilization
When you get your first credit card, you probably won’t even know what this is. I didn’t.
Credit utilization is factor used in credit scoring. It measures the percentage of your credit limit which is being used. The higher the percentage, the worse your score will be. And it doesn’t matter if you pay your bill in full every month, because your statement balance (before payment) will still be reported.
So know how credit utilization, also known as your debt to credit ratio, will affect you.
#4. Understand how the grace period really works
With most credit cards, there is a grace period – if you pay the full amount of your bill on-time, you will not be charged any interest.
However these grace periods are often misunderstood. Why? Because they only apply if you pay your bill in full. If you don’t, then interest will be charged retroactively going back all the way to the date the purchases were made.
In other words, there is no grace period if you don’t pay the full amount due. For a more detailed explanation read this article about how credit card grace periods work.
#5. Compound interest can be brutal
Remember back in math class when the teacher showed you how compound interest can makes it possible to (a) grow your money in a bank account, or (b) go broke by paying debt. If you need a reminder, play around with this credit card repayment calculator.
My advice? Always pay your credit card bill in full!
#6. Zero interest promos are not your friend
I don’t remember if my first credit card had this, but often times when you apply for a new account it will give a 0% interest rate for a limited time – i.e. the first 6 or 12 months the account is open.
For the credit card veterans out there, these 0% deals can used strategically to their advantage. But guess what… you’re not a credit card veteran yet!
If you’re brand new to credit cards, these can turn into a trap… you may use them with the intention of paying off the debt before the promotion ends, but you know life goes… unexpected expenses always pop up, which may make it impossible to pay off on time!
One of the most important tips I can tell someone who’s starting out is this: don’t use 0% promos as an excuse to carry a balance.
#7. Don’t spend more to earn rewards
In the grand scheme of things, credit card rewards are trivial – typically they’re worth no more than 1% to 5% of how much you spend.
If you earn that on purchases you were going to make anyway, then that’s free icing on the cake. But don’t be delusional and tell yourself that it makes sense to buy a $3.29 Red Bull at the Shell station, just because your card gives 5% cash back at gas stations. Hmm… so you save 16 cents there, but you can buy it for over a dollar less at Target. Which makes more sense?
Buy things wherever they are cheapest, period. Don’t let your rewards program dictate where or how you spend your money.
#8. Have realistic expectations
Let me put this to you in plain English…. Your credit sucks. This will be your very first credit card, so my advice is to have realistic expectations of what you will qualify for.
- College Students – If you fit in this category, definitely apply for a college student credit card. They are easier to qualify for if you have little to no credit history (which will be the case for you).
- Everyone Else – There are cards for fair credit, which you will have the best chance at qualifying for. However most of those are very lackluster. If it was me, I would try and go for a student card because they’re geared towards people newer to credit.
#9. Credit Card insurance isn’t worth it
When you receive your brand new shiny card in the mail, there will be a phone number to call for activation. When you do this, 9 times out of 10 the rep will try and get you signup for a payment insurance plan.
Payment protection insurance on credit cards makes a lot of sense for the bank, but little sense for the consumer.
#10. Don’t cancel your first credit cards (usually)
This was a mistake I made! My first credit credit had a limit of only $500, which often times wasn’t even enough to cover my monthly spending. As a result, I would have to make 2-3 payments per month, since my available credit wasn’t sufficient.
Despite this going on for 2 years, they refused to increase my limit beyond $900 (still not enough to cover my monthly purchases). That pissed me off so much, I cancelled my card out of rage.
That was a mistake. Your credit score takes into account the average age of accounts – the older, the better.
So here’s a good tip: Even if you hate your first credit card, it’s best to keep it open for that reason alone. The exception to this rule would be if your card charges an annual fee. If that’s the case, then the cost of the card probably outweighs the benefit of keeping it open long term.