Your First Credit Card

Before getting a credit card, ask yourself what you are going to use it for. If you’re a convenience user, you intend to use it as a tool for managing purchases and spending. If you’re a credit user, you intend to borrow money you don’t currently have and then pay it back over many months. Convenience users build better credit scores and don't fall into many of the common traps credit cards can present.

When opening a credit card, be ready to read the fine print of your user agreement. You never want to see unknown fees pop up on your monthly bill, and you never want to be late on a payment.

Why sign up for a credit card?

1. Build Credit- Your credit score is a number used by banks and other financial institutions when determining if you qualify for an auto or home loan, among other things. To get a good credit score, you must prove yourself financially. Responsibly using a credit card is one of the main ways to create a credit history and improve/maintain your credit score.
2. Traveling Abroad- Instead of carrying around a bunch of Euros or Pesos, you can use your credit card. Just be aware of exchange fees your provider might charge you and if your card is even accepted overseas.
3. Consumer/Fraud Protection- Most providers will not hold you responsible if unrecognized charges show up on your card or if it gets stolen. Once you report an incident, the company can no longer hold you liable for subsequent charges.
4. Convenience- Some places don't accept debit cards, and rental car places won't let you leave the lot without seeing your credit card. You might also have times when a bill is due but you don't get paid for another two days, or you might simply be short on cash. While credit cards shouldn't be your emergency fund, they can help from time to time.
5. Employment- While current and potential employers cannot access your credit score without warning, they can request, with your official consent, a special credit report from any of the major credit bureaus. This credit report doesn't contain everything a lender can see, but it does contain your credit score and a few other pieces of information that help employers determine if you are a high-risk candidate.

What types of cards are available to me?

There are many credit cards to choose from, but the fastest and easiest way for you to open a credit line is through a student credit card. These cards are especially designed for students in their current financial situation, and they can offer rewards and/or rates to meet your needs as a college student. It's also much more likely that you'll be approved for a student card than a general credit card as a first-time credit user.

What is the best way to obtain a credit card?

• Know your credit score (if you have one already)- If you want to know your credit score, you generally have to pay for it. Credit Karma and AnnualCreditReport.com are great free options. This is one of the most important steps you can take in applying for a card.
• Don't apply for the first offer you see- ​This is a very common mistake, especially since the first offers you get seem simple and lucrative. However, if you don't first shop around, then you could miss out on even better rates and cards that fit your circumstances. Something to keep in mind is that every time you are rejected from a credit card application, your credit score takes a hit, so don't apply for an offer unless you're certain it's for you.
• Include all of your income in the credit card application- Not only does this open you up for more credit opportunities, but you can be charged with credit fraud if you fail to accurately report your information.

What should you look for?

• Grace Period- When your bill arrives at the end of the month, you’ll have a certain number of days to pay it off (usually 21-30) before it's considered late. If you pay it even a minute late, interest has already started to accrue.
• Credit Limit/Line- A credit limit is decided by your credit provider. For college students, a limit could be somewhere between $500 and $1,500.
• Interest Rate/APR- If you don't pay off your monthly bill in full and on time, interest will start to accrue. A competitive interest rate for credit cards sits around 8-10%.
• Annual/Hidden Fees- Some companies might charge you an annual fee for using the card. Other companies might charge you for redeeming rewards, spending beyond your credit limit, or terminating the card for not using it. Don’t let these catch you off guard.
• Rewards- Some providers offer air miles, cash back, or 0% interest for the first few months. Naturally, you want to know about all of these.

What are APR's?

The annual interest rate (APR) is a critical aspect of credit cards. It's the yearly interest rate on your card. APRs are a simple way to compare credit card offers. The lower the interest rate, the better. In addition, APRs can be fixed or variable. Fixed-rate APRs don't change; meaning, you can expect the same interest charge for each bill on your rollover balance. However, if a change were to occur, you must legally receive a 45 day notice from your provider. Variable APR rates act oppositely; they can go up or down, based on a prime rate, and you won't receive a notice when this happens.

If you pay your credit card bill on time and in full every month, you don’t have to worry about APRs (but you'll have to be mindful of other fees when choosing your card).

Getting Out of Debt

When using your credit card, make sure to never spend over the amount you budgeted for. However, if you've already accumulated some hefty credit card debt, it's time to pay it off before you accrue too much interest to handle. Paying off your credit card bill may seem impossible at first, but it's completely do-able. View our Borrowing Principles, Debt Management, and Debt Repayment articles for more information.

Common Mistakes

• Not shopping around for better APR rates- Make sure you make plenty of comparisons and find the best rates for your circumstances.
• Not reading the fine print- This is one of the most dangerous mistakes you could make when getting a credit card. Make sure you know exactly what you're signing up for.
• Making the minimum payment- If you always make the minimum payments on your balance and continue to use the card for purchases, then it could take you many years and a lot of extra money (paid in interest) to pay it off. Pay off the balance in full every time, and don't ever use the credit card if you cannot pay for everything you purchase with it.
• Paying your bill late- This can damage your credit score and invoke other penalties in your contract, including heightened interest rates.
• Maxing out your card- This can prevent you from making further purchases on your card, invoke hefty over-limit fees on your account, and also be highly difficult to pay off.

Credit Card Calculator

If you're thinking of applying for a specific card, see if the financial institution you're working with provides different calculators to find your minimum monthly payment, the impact of your current interest rate on your balance, or similar calculations. While we don't promote or endorse any specific credit card calculators, we found that BankRate provides several objective credit and debt calculators which can help you begin your own research.

Pre-Screened Offers: Opt-Out

Pre-screened credit card offers refer to the credit card offers you receive (usually in the mail) that say you're pre-approved for a certain credit card. While these offers seem like a quick and easy way to obtain a new credit card, they also pose a greater risk of identity theft, and insurance and credit institutions will continue to access your information to present you with these offers. It's your decision to opt-out or not; you can do so for five years at a time or permanently, with the option of opting-in again if you so choose. Visit this article from the Federal Trade Commission for more helpful information on this subject. Whether or not you opt-out, make sure to shred all documents and pre-screened offers you throw away. 

Disclaimers

In response to questions about using a credit card to develop a credit score, our guidance to students would include:

1. Avoid getting a credit card if you currently have a spending problem- If you frequently make unplanned purchases and spend more than you can afford, having a credit card may only amplify this problem. It would be well to have a working budget, and to make sure that you're able to pay for your school and living expenses without excessive spending before you start using a credit card. Having your spending under control will be important to protect you against going into unnecessary and expensive debt.
2. Have an emergency fund in case you have any charges on your credit card and your income is disrupted- For example, if you put charges on your card and then are unable to work due to illness, you could use money from your emergency fund to pay your credit card charges. As you know, missing a payment would adversely impact your credit score. Ideally, it would be best to have an emergency fund that is equivalent to your credit limit. So, if the credit card offers a $500 spending limit, having an emergency fund of $500 would provide needed support if your income was interrupted, for any reason, and you had a payment due.
3. When using a credit card to build up good credit, many think about using it only for purchases they would make anyway (ex. groceries, school supplies, etc.)- In this manner, you make purchases you'd make anyway and use income that was already budgeted for these expenses to pay the credit card charges. Under this approach, you'd not introduce any new expenses into your budget; rather, you would simply pay for these regular, anticipated charges with a credit card and then pay the credit card with money that was already budgeted for these expenses.
4. Understand what factors go into the calculation of a credit score- Research this important topic before you apply for a credit card.
5. Obtain a copy of your credit report to ensure that the information in the report is accurate- You can obtain a free copy of your credit report at Credit Karma or AnnualCreditReport.com.

Please understand that a credit card is not the only way to build credit. Having a student loan or an auto loan may also contribute to the development of a good credit score, provided that you make required payments on time, and pay attention to the other factors that impact your credit score. We're not suggesting that you should incur additional/unnecessary debt. We wanted to mention that if you currently have other loan obligations, your careful attention to these obligations would also contribute to the development of your credit score.

If you apply for multiple credit cards at the same time, this could have an adverse impact on your credit score. Each time you apply, the credit card company may check your credit, also known as a hard inquiry, and this can hurt your credit score.

Please also be sure to read the agreement carefully and make sure you understand the grace period and interest rate. It's generally advisable to avoid costly annual fees and many credit cards don't charge this fee.