Credit cards for beginners: All your questions answered

When you're preparing to apply for a credit card as a beginner, a little upfront research can go a long way. Knowing how credit cards work and what to expect during the application process can help you make more confident and informed decisions as you begin this important step in your financial journey.

Below is a breakdown of key information that first-time credit card applicants need to know and helpful tips on how to manage credit card costs after you open your new account.

Do you need a credit card?

A credit card can be a useful financial tool, especially if you're working to build or improve your credit history. Someday you may want to purchase a home, finance a car or apply for a student, personal or business loan. You need good credit to reach those objectives, and opening a credit card is one way that many people try to build a positive credit profile.

When you use a credit card responsibly, the account could help you create positive credit history over time. To do so, you should keep a low balance (30% of your credit limit or less) and pay your bill on time every month. Remember that opening a new credit account can temporarily lower your credit score due to the hard inquiry, so you should refrain from opening more than one card at a time or having too many open credit card accounts. Your credit score typically begins to recover within a few months of opening a new account, especially if you make on-time payments and maintain low credit utilization.

It's also important to remember that many factors affect your credit score, including payment history (on other debts in addition to credit cards), revolving utilization ratio, length of credit history and more.

What does "good" credit mean?

When you have a good credit score, it indicates that you've shown responsible borrowing behavior over time. On a FICO® Score scale of 300 to 850, most lenders classify a score between 670 and -739 as good. Scores above that range may be considered "very good" or "exceptional."

When you work to build a good credit score or better, it's usually easier to qualify for financing products like credit cards and loans. Good credit may also make you eligible for better borrowing terms including lower interest rates, lower fees and higher credit limits.

What are other reasons to get a credit card?

Besides helping you establish credit, credit cards offer other benefits as well. Here are several additional reasons you might want to consider opening an account:

• Fraud protection: Most credit cards offer Zero Liability protection. This benefit means you're not responsible for unauthorized charges if your card is lost or stolen.
• Convenience: Credit cards are simple to use since retailers accept them at a wide range of in-person and online locations.
• Rewards and cash back: Many credit cards let you earn cash back, points or miles on eligible everyday purchases.
• International spending: Some credit cards offer favorable exchange rates for overseas transactions. Plus, they feature the added security and convenience of not having to travel with large amounts of cash.
• Emergencies: Having a credit card can help you cover surprise expenses, like emergency car repairs or medical bills, when you don't have enough cash on hand. But it's still important to build an emergency fund so you can pay your bill each month and avoid creating credit card debt whenever possible.

How do credit cards work?

Understanding how credit cards work can help you enjoy the benefits your new account offers while avoiding costly mistakes. Below is a basic breakdown.

1. You make a purchase: Whether online or in person, you provide your credit card details to merchants to pay for various transactions.
2. The merchant's bank contacts the credit card network: It's the job of the card network (like Mastercard or Visa) to route the transaction to your card issuer for approval.
3. Your card issuer reviews the transaction: Once your bank receives notification of the transaction, it must verify your identity and approve or disapprove the purchase. Your available credit is reduced: If your card issuer approves the transaction, it will reduce your available spending limit by the purchase amount.
4. Your available credit is reduced: If your card issuer approves the transaction, it will reduce your available spending limit by the purchase amount.
5. You receive a monthly statement: The card issuer will generate a statement at the end of your billing cycle that details all of your purchases, your previous balance (if applicable), your current balance and the payment due date.
6. You pay your bill: The best way to manage your credit card account is to pay at least your full minimum amount due every billing cycle. This approach helps you save on interest charges. Otherwise, any remaining balance will carry over to your next bill with added interest.

How is a credit card different from a debit card?

When you're using credit cards, it's important to understand that they differ from debit cards in one significant way. With a credit card, you're borrowing money from your card issuer and must repay that debt later (with interest if you're not paying off the balance before the end of the grace period). On the other hand, when you use a debit card, your bank withdraws the money you spend directly from your deposit account in real time.

What should you look for in a first credit card?

Before you submit the application for your first credit card, it's wise to review and compare key features of each account you're considering. Here are some details to keep in mind:

• APR: The annual percentage rate (APR) is an important factor to evaluate when you're reviewing a credit card offer because it indicates how much you'll pay in interest if you carry a balance. Pay attention to regular, introductory and promotional APRs on credit card accounts as each rate can impact your borrowing costs.
• Fees: Research to see if the cards you're considering charging fees, such as an annual fee or, foreign transaction fees. If fees apply, make sure the benefits the card offers outweigh any costs.
• Rewards and sign-up bonuses: Consider if the cards you're interested in feature rewards, sign-up bonuses or promotional offers. These types of benefits could add value to your cardholder experience, as long as you manage the account responsibly.

What are some of the 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 many fees altogether. Be sure to read the fine print about these common credit card costs when you're filling out your application.

• Interest charges: You can avoid interest charges 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 an 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. 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: Credit card companies often charge 3% to 5% of the amount you transfer to your new credit card for balance transfers. So, it's important to do the math and make sure any potential savings from an introductory or promotional APR has the potential to outweigh the cost of balance transfer fees.
• Foreign transaction fees: Some cards add a surcharge of around 1% to 3% on purchases from an overseas merchant, though many credit card companies don't charge this fee.

What are some types of credit cards?

Several credit cards are available on the market. So, it's wise to research and find the right fit for your lifestyle and spending habits. Different types of credit cards may work better for some people than others. If you have good credit, for example, you'll have a wide variety of credit card options. But with fair or poor credit, you may want to focus on cards designed to help people establish or rebuild credit history.

Here are a few types of credit cards:

• Rewards: Rewards credit cards give you something back for each eligible purchase you make. Rewards cards can include travel rewards cards, airline cards, hotel cards, retail store cards and more. But you typically need good credit to qualify for this type of account. That can be a challenge when you're a credit card beginner. Still, it's a good idea to learn about these types of cards for the future.
• Cash back: You can also find flexible cash back reward cards. A cash back credit card gives you a percentage back on purchases you make, which you can then use toward a larger goal or budgeting.
• Balance transfer: A balance transfer card lets you move debt from your current card to an account from another issuer. People typically use balance transfer offers to take advantage of a lower promotional interest rate with a new card in an effort to pay down credit card debt.
• Secured card: Secured credit cards can often be a good fit for beginners with no credit history or people who have struggled with past credit problems. Card issuers often require a security deposit to open this type of account. The good news? The deposit is typically refundable when you close your account in good standing with no remaining balance.

Remember that it's important to choose a card that fits your credit profile and life goals. Look for a credit card that offers benefits that align with your needs. If you value flexible rewards that are simple to earn and redeem, a cash back card might appeal to you. But if you're interested in paying down debt, a balance transfer credit card offer could make more sense.

Ready for your first credit card?

A credit card can be a powerful financial tool when you use it wisely. It can help you build credit, manage your spending and unlock other valuable perks. Just remember that all credit cards for beginners are not created equally so, take time to research your options and choose a card that fits well with your financial goals.

Visit Citizens to explore credit card options and find one that fits your needs.