So you’re ready to get your first credit card? Or maybe you have one but you don’t like it very much (bad interest rate, low limit, poor customer service, associated with a bank in a place you no longer live, etc….) and you’d like to find a new card. Finding the right credit card is a very personal decision. Credit cards can be incredible assets and help your life immensely. They can also be horrible liabilities and really hurt you, financially and psychologically. Remember that the average American who carries a balance on their credit card, is in credit card debt over $15,000. That happens from choices made around your credit card. If you follow the seven-step thought process I outline below, you can grow into a responsible user of a credit card and build a good credit score.
1: Know if you’re ready
Before you start filling out an application, you need to reflect on whether you can handle the responsibility you are asking for. First, do you make enough money to be able to make payments on a credit card. If you are applying on your own, most cards require you to make at least $30,000. This is based on my research using the NerdWallet compare credit cards list last year. They have really revised the look of the compare feature, and I am no longer finding income as a criteria, but I still believe this is relevant. For some reason 30k is a benchmark income level in many conversations about finance, probably because it is a livable income in most places across the United States. Now, if you make below that threshold, it doesn’t mean you can’t get a credit card. If you are working with your local bank, they know you better than a big credit card company and may make a different decision. The income level is seeking to separate part time workers from full time workers, high school and college students from full time working adults. When I started out, I didn’t make this much, but my parents did. Since my mom co-signed, it was her income qualifying me for the card. But now, I can apply for cards on my own since I make well over $30k.
Second, you need to know if you have the habits and mindset to handle a credit card. If you have a debit card, do you often have overdraft fees? If so, you might not be ready for a credit card. Regularly overdrawing your account means that you are not tracking your spending carefully. Maybe you forget about a purchase you made and you thought that money was still in there. Find a strategy to tackle your debit card spending before adding a credit card into the mix. Using a bank that has an app that you can check regularly can really help out. My Huntington checking account even has a feature where it will text you if your balance falls below a certain threshold that you can choose. I have mine set to $30, so every time my balance falls below $30, it sends me a text with the current balance. Research shows that people spend more money when they use a credit card versus cash. If you reach the end of every month and realize you haven’t saved any money because you spent all of your extra income, you might not be ready for a credit card. When it comes to credit cards, if you don’t repay the total amount you spent in a month, you’ll be charged interest, which is nothing more than paying twice for your stuff. Visit my credit card best friend post to learn about the math behind interest charges.
Once you’ve got the money and the mindset for a credit card, move on to the next step.
2: Know your limits
This goes along with your mindset and habits. You are going to be able to spend on this credit card more freely than you are with a debit card because you don’t actually have to have the money available. When first starting out, set rules for your credit card for yourself so you don’t accidentally buy too much in a month. Perhaps you set a rule that the card is only for buying gas for your car. Or perhaps you say you can only spend up to $50 on an item. Definitely don’t link it to your Amazon Prime account (if you have one) or let yourself go to Target with it. People always spend way too much at those stores. A really good way to control your impulse to spend, is to not take the card with you on day to day shopping trips. It is all too easy to tell yourself “I can just put it on my credit card” if something is really tempting you.
The other limit you’ll need to know, once you get a card, is what your actual credit limit is. When I first started out, my limit was $500. If you reach the limit, your card will be denied. And remember when it comes to building good credit with this card, you need to keep your utilization to 30% or less. If you get a card that has a limit of $1000, you should only ever reach a balance of $300.
3: Know your credit score
Your credit score, if you have one, will determine whether you get a credit card and what its features are. When I first started out, I didn’t even have a credit score, so I had to have my mom as a co-signer. She guaranteed to the credit union that the bill would be paid. If you have this option, talk to your parents or guardians about opening a credit card. If the card has a low limit like mine did, many parents will do this.
Another option if you don’t have a credit score would be to talk to your bank about a secured credit card. Most credit cards are unsecured but a secured card can help someone start out with credit cards. Basically, a secured credit card means you secure the credit, with cash, when you open it. The cash is what’s called “collateral” which is an asset the bank can take if their loan is not repaid. If you are unable to obtain a credit card at first, try to do the secured option.
If you do have a credit score, the score will influence the limit you are given and the interest rate. It’s good for you to know your score before you apply so that you are not shocked by the results of your application. If you see that you have a low credit score, you can take steps over the next six to twelve months to improve your score before applying.
4: Decide the purpose(s) of your card
If you’re just starting out, you might just want a basic card: one that lets you spend and repay easily just so you can build credit. That’s awesome and most cards will suit your purposes. But perhaps you are about to study or travel abroad. You will want to try to obtain a card that has no foreign transaction fees. Maybe you live far from your parents and want a travel rewards card that you can use to help you buy flights back home. You can use NerdWallet’s compare feature to select the purpose of your card to narrow your choices in your research.
Other purposes of your card go back to your mindset and habits. I have one card that is set aside for emergencies. An emergency for this is something like getting lost in the middle of nowhere and needing a tow truck to tow me home 100 miles. Or it could be a wild medical emergency, like during my first conference as a full time teacher when I had an allergic reaction and I went to an out of state hospital. That $400 bill could go on a credit card because I don’t just keep an extra several hundred dollars in my checking account. Emergencies should really only be classified as medical or car trouble. And the emergency part is that I don’t have the cash on me. I literally don’t use that card for anything unless there is one of these emergencies. I haven’t used the card in years. Set a purpose for your card. If the purpose is for travel, that means you won’t use it in your hometown. You need to be strict on that so you don’t overspend.
5: Ask Questions
Knowledge is power. Ask questions and do research to ensure you understand your obligations with a credit card. For someone just starting out, my honest and best recommendation is to use your local bank to apply for your first credit card. I might be old fashioned, but I always feel better when I can talk, face to face, with someone about big decisions. You can definitely apply for a credit card online. I just don’t feel comfortable opening new accounts online because I can’t get my questions answered as easily. Sometimes it’s just easier to have a conversation with someone.
If you’re on a second or third credit card and you already know how all the basics work, you can spend more time online doing some research. You are able to find all of the criteria necessary for you as an applicant to be approved (credit score, income level, past credit card limits, etc.) and you can find the criteria of the credit card, like interest rate ranges, cash back features, foreign transaction features, etc.
Once you have considered all of the above steps, it is time to apply. If you do it online, of course be sure to apply on a secure browser and non-public computer. If you’re just starting out, go into the bank and apply. Often times, if you open a new bank account, they might talk to you about a credit card even if you don’t bring it up. When I opened my Huntington Account, they looked at my credit score and the woman said, “you are pre-approved for the Huntington Voice card with a limit of $6500.” I had no intentions of opening a credit card that day, but my attention was piqued by the limit. There was a rewards card i had read about that required you to have had 5 years of a credit card with a limit over $5000 in order to be eligible. I am pretty sure this card is no longer in existence today, but opening a card over that limit meant I would eventually be able to get this better, awesome rewards card I wanted. I asked a series of questions and decided to apply and open the card.
7: Use the card with care
Now that you have a credit card, you need to be very careful with it. It is very easy to fall into a spending habit. Don’t ever spend more money on your credit card than you actually have in the bank. Be sure to pay on time, every time. Be sure to pay your bill in full every time. Never, ever pay interest. Don’t take your credit card with you to the bar (only use cash there). You’ll overspend and you increase your chances of losing the card. If you ever lose your card, call the company immediately and report it lost. They will cancel the card and issue you a new one. Check your statements. Check them daily online to make sure no one has stolen the number and is using it elsewhere. Report fraudulent activity immediately.