7 things to do before applying for your first credit card
If you’re a college student, you’re probably familiar with the sight of local credit unions camped out in the quad, offering free hats and T-shirts as incentives for applying for their credit cards. As tempting as it may be to walk away with a $500 credit line and a potential 0% interest offer, there might be negative consequences to getting a credit card.
Credit cards aren’t all bad and, in some cases, are even necessary. You can use credit card rewards to travel the world, pay expenses and finance big purchases. If you’re new to credit cards, they might seem overwhelming, and the various jargon around them is likely confusing. Luckily, we’re here to help you navigate that world. Here are seven things to do before applying for your first credit card.
Related: How to build credit without a credit card
1. Know the difference between secured and unsecured cards
When applying for your first credit card, you have limited options: Secured and unsecured credit cards. Unsecured cards include student credit cards with low limits and no annual fees. As a student, you can easily get approved for these cards if you have some income on your application. If you’re not a student, there are plenty of unsecured “starter” cards, like the Capital One Platinum Card.
Most secured credit cards require a deposit of at least $200, making keeping a low-utilization rate (under 30% of your credit limit) challenging. Meanwhile, a secured card requires a security deposit, which will be your credit limit. The deposit will cover your debt if you max out your card and stop paying it.
You’ll usually get your security deposit back after a year, when the issuer decides to convert your card to a non-secured version. Secured cards are good if you can’t get approved for a student credit card or want a higher credit limit, assuming you can afford to pay the deposit for a year.
2. Understand interest rates
Before applying for your first credit card, you should understand how credit card interest rates work. Credit card interest rates are also known as annual percentage rates (APR). They typically range from 15-25%, depending on the card type and your creditworthiness. Most starter cards have higher APRs. Credit card companies will target you for lower rates as you build your credit history.
The APR rate is the interest you’ll incur if you don’t pay your card off monthly. Suppose you carry a $1,000 balance and your card has a 25% APR. You’ll pay around $21 in interest every month. You can avoid interest by paying off your statement balance in full every month, which I recommend since it reflects positively on your credit history.
Some credit cards offer introductory APRs of 0% for six months or longer. It might be tempting to overspend and carry a balance during this period, but that might not be the best move. These offers are designed to trap cardholders into debt so they’ll pay interest fees when the intro period is up. Don’t fall into that trap — always pay your card off.
If you can’t pay a card in full, you should aim to make the minimum payment. It’s a small fraction of your balance, but paying it keeps your account in good standing.
Related: Should you ever sign up for a store credit card?
3. And the importance of income
Your income will impact both your credit limit and your approval odds for certain cards. You might need to provide proof of it to get your application approved. Banks want to ensure you can repay your debt, so you must provide income information. The good news is that student credit cards typically have more lax requirements around income.
If you’re under 21, you can have a parent or other adult cosign the application. In doing so, they effectively take financial responsibility if you can’t repay your debt. You still need to list your own income on the application, but the bar is lower for college students.
If you’re over 21, you can even list your partner or spouse’s income on the application. This will certainly help your odds of getting approved.
You don’t want to inflate your income or be dishonest in any way. Credit card companies will issue you credit based on what they think you can handle. If you inflate your income, overspend and cannot pay off your card, you’ll hurt your credit score and financial stability.
4. Make a plan for avoiding debt
Credit card debt is a common and debilitating problem that you can easily fall into. According to the Federal Reserve Bank of New York, Americans currently have a collective $887 billion in credit card debt. People spend more when they’re using credit cards than cash, which makes it essential to make a plan for avoiding debt before getting your first credit card.
Your starter card probably won’t have more than a $500 credit line, but even that can be a problem if you’re spending more than you can pay off monthly. To avoid debt, consider using your credit card for bills only. Set up automatic payments for your monthly bills and use your debit card for everyday purchases. You’ll likely spend less while still building your credit history.
5. Understand how your credit score works
Understanding how your credit works is key to maintaining a good score. When you apply for a new credit card, your credit score takes a 2-5 point hit that rebounds fairly quickly. As you use the card responsibly and pay it in full every month, you build your credit history and increase your score. You’ll be glad to have done this when you graduate college, rent your first apartment, lease a vehicle and eventually purchase a home. The good credit habits you build now will enable you to do all those things in the future.
According to My FICO, credit reporting agencies determine your credit using the following factors:
Payment history – 35%
Amounts owed – 30%
Length of credit history – 15%
Credit mix – 10%
New credit – 10%
In short, you should maintain a low utilization rate (under 30%), pay your balance in full every month to avoid interest fees, request a credit increase after a year and add another card or two to your portfolio over time. This will keep your utilization rate low and show that you can manage multiple credit lines without incurring debt.
Related: The pros and cons of ‘buy now, pay later’ apps
6. Sign up for credit monitoring
Some student cards come with complimentary credit monitoring services. If yours doesn’t, you can sign up for Credit Karma’s free service. This is a crucial step in your credit journey because you’ll be notified when your credit score increases, drops or when new inquiries are made on your credit report. Credit fraud and identity theft are rampant these days, and by signing up for these services, you’ll be alerted of suspicious activity.
7. Make sure you're in it for the long run
Your first credit card matters because it will likely be your oldest card, which is the foundation of your credit history. You don’t want to apply for a card at 18 and close it after having it in your wallet for four years. You’d essentially erase the credit history you’ve built so far and start over.
When you’re applying for your first credit card, be sure to get one that you’ll keep long term or that you have the option to convert into a more desirable rewards card down the line. Banks like Citi, Chase and Capital One are good places to start. They offer student credit cards that you can upgrade to ones with higher credit limits and better rewards earning structure without closing a card or obtaining a new one.
One last thing
While you can build credit history without credit cards, they are an easy stepping stone for building your credit history, if you use them responsibly. Know your interest rate, pay your cards off every month and you’ll reap the benefits these financial tools offer. The key is to avoid the trap of borrowing more than you can reasonably pay off, which is easily done if you stick to using it for recurring bills only. Once you get the hang of these student credit cards, you’ll be prepared to manage different types of credit lines, including rent payments and a mortgage. Take it step-by-step!
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