As soon as most Americans turn 18, they’ll start to see that their mailbox is full of credit card offers. This supposed “free money” may seem enticing, but there is much more to it than you might think.
Interest rates, grace periods, and yearly fees are just a few things to consider before signing up for your first card.
Understanding how this decision could affect your credit and future financial goals is crucial to setting yourself up for success.
Navigating the application process can be overwhelming, especially considering the barrage of technical language and acronyms involved. Before you apply for your first credit card, keep these tips in mind.
1. Consider Your Income
One of the most important factors to take into consideration is your ability to pay your balance each month.
If you want to build your credit score without going into debt, you need to be sure that you won’t carry a balance.
Take a look at your income and determine how much you’d be able to reasonably spend each month.
Many people get trapped by the debt cycle as soon as they open their first card because they spend more than they can afford.
Responsible credit card ownership is as simple as only buying what you can realistically pay for. Or, at the very least, understanding how a monthly balance will affect your long-term financial standing.
2. Compare Interest Rates
The primary reason why you don’t want to carry a positive balance is because of the interest that you’ll incur.
If you pay off your credit card balance every billing cycle, you won’t have to worry about paying interest on the amount you borrow.
Sometimes people use credit cards to pay for unexpected emergencies, in which case paying the balance off immediately might not be a realistic option.
If you expect to take a longer time to pay off your card, take special care when it comes to comparing interest rates.
You might think that a rewards card is a good option for your financial needs and spending habits. But, if that card comes with a 25% interest rate and no grace period, collecting points might cost you much more in the long run.
Some cards offer a grace period, such as a zero APR signing bonus. In most cases, this is the best choice for anyone who doesn’t plan to pay their balance immediately after using their new card.
3. Don’t Skip Over the Fine Print
Similar to interest rates, you also need to think about annual membership costs and withdrawal fees.
Some cards allow you to use special functions, such as ATM cash withdrawal or balance transfers.
Sometimes these additional perks can keep you out of financial turmoil, but make sure that you’re aware of any potential fees or penalties.
4. Take Caution Regarding Credit Limits
It might be tempting to take the highest credit limit you’re offered when looking for your first credit card. Having a long line of credit can be useful, but it can also be dangerous if used irresponsibly.
Like previously mentioned, you want to be aware of your ability to handle the potential short or long-term debt you are applying for.
If you can’t trust yourself to stay within a certain percentage of your total limit, it might be wiser to opt for the smaller card.
Your credit limit also impacts your ability to build and maintain your credit score. In most cases, you want to have a high usage rate. But, your debt should exceed no more than half of your total available credit amount.
5. Be Realistic
Regardless of the card you choose, it’s a major financial decision. Don’t overlook the impact that it can have on your future and financial security.
Interest rates, hidden fees, and extra perks can all add up. Outline the features that are most important to you, and use that as a guide when comparing credit offers.
Also, keep in mind that a credit card application will count as an inquiry on your credit report. Go into the process informed and prepared to prevent an unnecessary reduction in your score.
A credit card can be a useful tool for building your credit and ensuring economic stability. And, it’s a great line of defense for unknown emergencies or large purchases. Keep these tips in mind to stay on the safe side – and out of financial delinquency.