A recent study from the Boston Federal Reserve found that 70% of Americans have at least one credit card. If you’re one of the 30% that don’t, you’ve likely done some initial research on things like how credit cards work and how to choose a credit card. Now, you may be curious about which is the best first credit card for you.
Today, we’re here to outline the process of how to choose the best first credit card. No matter if you’re looking for a cash-back rewards card or an option to help build your credit, you’ll know exactly how to find the best option after reading this article.
What Is a Good First-Time Credit Card?
When watching TV or browsing the internet, you’ll see ads for dozens of different credit cards. You may even receive card offers in the mail. But before choosing a card, do your research to figure out which one will make a great first card. How can you figure out which one to apply for? It helps to understand what you’re looking for in a card.
What Will You Be Mostly Using the Card For?
The first thing that you need to determine is how you’ll use the card. Broadly speaking, there are five primary categories that you can break down credit card usage into:
- Emergencies, or for cash advances
- Build credit history
- Balance transfers
If you are going to be using the card for everyday purchases, on everything from an Amazon order to a trip to the grocery store, then you’ll want to consider general rewards cards. These cards typically provide you with points or cashback based on a percentage of what you spend.
For instance, you can find a cash reward card that offers unlimited 1.5% cashback. So, let’s say that you spend $100 on the card in August. You’ll receive $1.50 back that you can use as you please. You can apply this toward your statement credit, purchase gift cards or a deposit into your bank account.
You can also find rewards in the form of rotating categories where you can earn an inflated percentage each quarter. For example, from October 1 to December 31, you might be able to earn 5% cashback on purchases made at retailers while earning 1% on all other purchases.
If you are primarily going to use the credit card for traveling, you can find cards geared toward your needs. If you fly frequently, you can find a card that provides you with travel rewards for your favorite airline.
If you spend more time in the car, you can find a card that will give you a higher percentage back on transit and gas stations. Other travel perks that you may find include the waiving of foreign transaction fees. Shop around for the travel rewards card that meets your spending habits.
If you only plan to use the card in emergencies, you don’t need to be as worried about cashback rewards. Instead, you’ll want to look into credit cards with favorable cash advance rates. If you use your card’s cash advance feature, you can withdraw cash even though you don’t have it on-hand in your bank account. The card provides you with a short-term cash loan that you’ll need to pay back.
Cash advances are costly, as they usually come with steep interest rates or hefty fees. But if you’re in an emergency and need cash fast, they can be a viable option.
Building Credit History
Your credit score is what lenders use to determine your creditworthiness. Essentially, it’s a measure of your likeliness to repay debt and make timely monthly payments. The major credit bureaus use either the FICO Score or VantagePoint 3.0 score to determine your credit score.
Credit card issuers understand that you may have no credit when applying for your first cards. It’s easy to learn how to get a credit card with no credit or bad credit.
These types of cards may need to be secured. This means that you put down a security deposit to determine your line of credit. So, if you put down a $500 deposit, you’ll have a $500 line of credit. If you want a higher credit line, you’ll need to put more cash down.
Responsible use, like avoiding late payments, will boost your credit score. If you’ve improved your credit score by the end of your first year, you can apply for other cards.
There are also student cards for college students with nonexistent or limited credit. Some of these cards may offer student cash back for good grades throughout the school year, even if you don’t have any available credit.
Knowing what impacts your credit profile will put you in a better position for long-term financial success. Make sure you understand everything you need to know about credit scores before applying for your first card.
The last type of card is for balance transfers. We won’t touch on those much since those are for people who have already racked up debt on credit cards and seeking a new card that offers better terms like lower interest rates. Unfortunately, people often open their first credit card without understanding how to calculate interest on these cards. Along with over spending, the compounding effect of credit card interest rates is often the culprit in ever-increasing balances.
If you practice good card use and make on-time payments by your statement due date, you won’t need a balance transfer card. But, if you do find yourself having to look for one of these cards, be sure to consider terms like variable APRs and the balance transfer fees associated with the cards.
Understand Credit Card Terms
The other thing to consider when applying for starter cards is the terms of the card. Many people are drawn into the sign-up bonus that companies offer during the account opening without understanding the conditions that come with the card.
However, understanding the terms of the card is far more critical than, say, the bonus categories companies offer on cash-back cards. Below are some of the essential terms that you need to consider when searching for your first card.
- APR — Known as this Annual Percentage Rate, this is the yearly price that you pay for borrowing money.
- Purchase APR — The APR that credit card companies apply to the purchases you make using your card. When you carry credit card debt from month to month, the purchase APR will kick in.
- Intro APR — The APR you’ll receive when first opening your card. Credit card companies offer Intro APRs as a perk of applying for the card. An Intro APR must last at least six months.
- Penalty APR — The APR that credit card companies charge if you’re late on payments. Your penalty APR is higher than your regular APR, often drastically. Penalty APRs are typically around 30%.
- Cash Advance APR — The rates that companies charge if you withdraw cash using your card. These rates tend to be very high — at least 25%. Cash advance APRs kick in when you withdraw money, not at the end of your statement period.
- Annual Fees — Recurring charges that companies may charge for you to use their card. These one-time fees can range from $25 to $500.
- Credit Limit — The maximum amount of credit a firm will extend to you. You can never exceed your credit limit. For instance, if your credit limit is $2,000, you cannot spend more than $2,000 on your card without first paying down some of the debt. The percentage of your credit balance to your credit limit is called “credit utilization.”
- Billing Cycle — The interval of time for your bills. Most cards have monthly billing cycles, which means you’ll receive a statement each month.
- Grace Period — This is the period of time a credit card company gives you to pay off your statement balance after the end of your billing cycle, without having to pay interest on that balance. The grace period runs from the end of a billing cycle to the next payment due date. Promotional grace periods can be a form of introductory lending offers such as “Interest-free for the first six months.”
- Secured Card — A card that requires a security deposit. The deposit determines your available line of credit.
- Unsecured Card — Unsecured credit does not require a security deposit. Unsecured cards are reserved for those with good credit and offer perks like higher bonus point rates.
Tips for Owning Your First Card
When browsing cards, companies will try to tempt you with intro offers. Be aware of promotional, introductory marketing tactics. For instance, companies may charge no fees for the first year but then spike the APR to 27% in the second year. Look for cards that will put you in a position for long-term success, not short-term gains.
When applying for a card, you want to focus on applying for those cards that you qualify for. Each time you apply for a credit card, lenders will run a credit check, which will lower your score.
If you have little to no credit, for example, there’s no point in applying for a card that has a minimum credit score requirement of 650. Doing your homework beforehand and reading the card terms can help you determine which cards you should be applying for. Typically, first-time cardholders will need to focus on:
- Secured credit cards
- College cards
- Department store or brand-based cards
- Basic cashback reward cards
After being accepted for your first card, practice responsible card use, starting with keeping your credit utilization at 30% or less and never missing a payment. Experts recommend you make on-time payments with your card and avoid interest charges which can add to your balances quickly. Companies may also charge late fees if you don’t make timely payments. Automating your payments online is the best way to ensure on-time payments.
High credit balances and missed payments cause significant damage to your credit report, and it can take you years to recover. With responsible use of your card, you’ll build credit history and put yourself in an excellent financial position down the road for larger credit needs, including mortgages and auto loans. The best credit card is the one that you can use with constraint and that you can pay off each month.
Your First Credit Card: Apply What You Know
Now that you’ve done your research, you’re ready to open one of the best starter credit cards for you. The greatest card is one that you can use with constraint and can pay off each month. No matter if you have fair credit or excellent credit, you’ll certainly find a card that meets your needs. Use your knowledge of how credit cards work, and the long-term financial rewards will exceed any points or cashback rewards you get today.