Credit cards for beginners: All your questions answered

What should I look for in a first credit card?

Below are a few terms to familiarize yourself with, and possibly look for, before you submit the application for your first credit card.

Interest rate: You will want to look for a card with a low interest rate. While other cards might offer more bells and whistles (i.e., points) consider the fact that you want to establish good credit and start slow.

APR: You may be wondering what this term means, and why you keep seeing it on every credit card ad. Don’t worry. It’s nothing scary. APR stands for annual percentage rate. You only pay APR if you carry a balance, and it often varies from card to card. And here’s a tip: If you pay the full balance on time every month, you can avoid paying interest altogether!

Sign-up Bonus: You may have seen “sign up bonus” in a credit card advertisement. A sign-up bonus is a promotion offered by a credit card issuer. It may also be called a welcome offer, or new applicant offer. Be sure to find out whether you have to spend a certain amount of money before the sign-up bonus kicks in, or whether you receive it as soon as you are approved for a card.

What are some reasons to get a credit card?

There are many uses for a credit card. A couple of examples are using rewards credit cards to help save money on travel or everyday purchases, or even using a credit card to help budget for your long-and-short term plans. But most of all, opening a credit card could help establish good credit. Your credit will be checked most likely, and your credit score will be based on things such as paying your credit card bill on time and the length of time for your credit history. Your credit score tells the lender how much (or hopefully how little!) of a risk you are to them for loaning you the dough. The higher your score, the more responsible you look to banks, potential lenders, and bureaus. Having a good score means you’re one step closer to a glowing financial profile (more on credit scores below).

How do credit cards work?

To make a purchase in a store or from your comfy armchair while shopping the web, your credit card details are sent to the merchant’s bank. Then your bank gets permission from your card’s network to process the transaction. And there’s one more step: Your card issuer has to verify you are who you say you are and approve or disapprove the purchase. Your available credit is now reduced by the amount of your purchase. You’ll receive a bill or statement at the end of the month detailing all of your purchases. Hopefully you paid your balance in full last month, so your previous balance is zero. However, if you did not, the current bill will show your previous balance, in addition to itemizing new monthly charges and when the deadline is for submitting payment. If you pay your bill in full, no interest charges accrue.

What does good credit mean?

A few of the most well-known credit companies are Experian, TransUnion and Equifax and FICO. While each has their own scoring system, FICO, for instance, considers a score of 670 to 739 to be good. Other companies are a little stricter, and the applicant must not have declared bankruptcy, been more than 30 days late to pay a credit card bill (if you had other cards) or defaulted on a loan in the past five years.

What are some different types of credit cards?

There are many different types of cards on the market, and it will be up to you which one works best for your lifestyle. Here are a few samples:

Rewards:Rewards credit cards give you something back for each purchase you make, but usually you must have established good credit first, which is hard when you’re a new card owner. But it’s a good idea to learn about them for your future. There’s a rewards card for just about everything these days, and there are many out there on the market. Rewards cards can include department store cards, airline cards, or hotel cards. You may also see these cards advertised as “cash back cards.” A cash back credit card gives you a percentage back on purchases you make, which you can then use towards a larger goal or budgeting.

Balance transfer card: A balance transfer card is exactly how it sounds! It lets you move your debt from your current card to another issuer. People do this to take advantage of a lower interest rate with a new card.

Secured Card: A secured card is often given to someone with no credit history, or someone who has struggled with keeping a good credit score. A security deposit is required to open this type of card. The good news? The deposit is refundable upon closing your account with no remaining balance.

What are some costs of carrying a credit card?

The good news is that if you choose the right card and pay your bill on time, you can avoid fees altogether. Be sure to read the fine print about these common credit card costs when you’re filling out your application. It could also help to speak to friends and family about what cards have worked for them to get ideas.

Here are some common credit card costs:

Interest payments: You can avoid interest fees by paying your credit card bill in full every month. You’ll want to avoid spending more than you can pay off with each billing cycle.

Annual fees: Some cards charge annual fees. They’re worth paying if the rewards you get from using the card make up for the costs, however, if you can find a card that offers no annual fees, even better!

Late payment fees: The U.S. government reports that consumers pay $12 billion a year in late fees. That’s a lot of Benjamins. Luckily federal regulations limit late payment fees. Usually, they are broken up into a first-time fee, a second late fee, and a third late fee within six months of the second.

Balance transfer fees: While these fees are usually waived if you transfer within a certain time, sometimes credit card companies can charge 3%-5% for balance transfers that can add up over time.

Foreign transaction fees: Some cards add a surcharge for around 1%-3% on purchases from an overseas merchant, though most credit card companies don’t charge this fee.

Q. Why is it important for a young person, 18-25, to start building credit with a credit card?

A. It’s interesting as I look back on my life, I wish this is one of those things I knew earlier on. Establishing credit at a young age is crucial to setting yourself up for success early in life. It’s funny once you stop and think about it, but most people don’t realize how much credit is really involved in our day-to-day lives. Your credit isn’t just checked by banks when you want a loan; it plays an important role in many of the most important moments of our life. Your credit is checked by landlords when you’re looking to rent a new apartment, it’s also checked by new employers when you go to apply for a job (scary right?!), it’s even checked by cell phone, electric, gas, cable, internet, and most other utility companies! Imagine the embarrassment of going to apply for that dream job at age 25 and your prospective employer chooses to hire someone else because their credit score is higher or more established? Guess what, it happens often! Nobody wants that! Opening a credit card at a young age and using it responsibly is really the key to getting on the right track early and not having to worry about these embarrassing moments.

Q. Why is it crucial to pay attention to payment timelines?

A. This is a great question that I can’t stress the importance enough; making payments on time is the biggest factor in building your credit score. Just one late payment can have major consequences and score impacts that can take years to recover from. I know personally. I set all of my credit cards, auto loans, and utility payments up for autopay to ensure I’m never late. If your provider doesn’t offer autopay, check with your bank, as most banks have automatic bill pay services. Also, payment notifications are key; always have those turned on as an option, or use the calendar reminders in your phone/computer to ensure you never miss a payment or are late.

Q. Are there certain kinds of credit cards that are better for students?

A. This is a common misconception. While there are credit cards out there that market themselves as “student” cards, they don’t necessarily benefit a student in any special type of way vs. other types of credit cards. I think when choosing a credit card, it’s important to choose one that you find value in, whether that’s a card with a special type of reward you enjoy or some type of travel perk. Personally, I prefer cash back cards; they are usually simple and easy to see how much value you can get back by using them. Not to mention I like to save up all my rewards every year then use them to take a much-needed vacation every December! I think you’ve got to find the card that works best for you.