So, you’ve finally decided to get a credit card. So far, you’ve avoided applying for one but after conversations with friends and some thought, the time has come.
If a credit account has alluded you thus far, you probably fall into either of two categories:
- You’ve been stunned by the horrifying stories of how credit can ruin your entire life or…
- You just hadn’t thought too much about it until adulthood became a real thing you had to deal with.
Either way, kudos to you! Deciding to apply for your first credit card is a big deal! Now… where do you start? There is so much information available and it can really be overwhelming to sort through. A great place to begin researching is with the basics. Why even research it at all? Because you don’t know what you don’t know. And “ignorance is bliss” is sage advice for everywhere except in the financial world.
Here are the basics of what you should know before you apply for a credit card.
- Know your credit score. There is a rumor that I fell for that claims checking your own credit score negatively affects your credit score. False! There are two types of credit inquiries and the way they affect your score are different. A hard inquiry, which is when your credit history is being reviewed by a prospective lender (like when applying for a credit card or applying for a loan) will affect your credit but the long term effects of properly managing those accounts overcome this. A soft inquiry, like checking your credit score, won’t affect your credit at all. Before you apply for a credit card it is important to know what your score actually is. This way you can apply for a credit account wisely, choosing one that fits your goals (improve your credit, diversify your portfolio, earn more cash back, travel, etc) and that is within your reach. If your credit score is not within the recommended range for a certain card and you apply anyway, you run the risk of your credit taking a hit for no reason.
- Know how to check your credit score and monitor your credit. You can get one free credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) once every twelve months. These credit reports don’t give you a credit score but they are useful for monitoring. You can also monitor using other programs and apps. Many of these apps will allow you to receive a credit report in addition to giving you your actual credit score. A monitoring app I recommend is CreditWise by Capital One. It has a simple-to-use interface, gives credit reports, breaks down your credit score into categories, and explains what is good, avg, and fair in each category.
- Know how interest is calculated and research the available rates. I’ve had many conversations with friends that went something like this,“So how does the interest work anyway? I mean, how is it calculated? I guess it won’t matter, I don’t plan to ever have a balance. I’m paying off my bill each month”. Well, that is an excellent goal, and if you spend wisely, one that is attainable. BUT, life happens. Be prepared! If something comes up and for some reason you can’t pay your account in full one month, you absolutely want to know how your interest is calculated and how much you’ll owe. Even if you plan to not hold a monthly balance on your account (which you should) pick a card with the lowest interest rate you can find.
- Know what fees, if any, you’ll be charged. I’ve heard time and time again, “don’t want to get a credit card with a yearly fee!”. But you have to do what works for you. I found a card with excellent benefits, that worked for my lifestyle, helped me reach my goals, and had great perks, BUT it had a low yearly fee. I almost decided against it and went with another card without comparable benefits for me JUST BECAUSE OF A YEARLY FEE!! Do your research and figure out what works for you! Tip: if you find a card with a yearly fee, check to see if they offer rewards in the form of cash back and allow you to use them however you choose (e.g. as an account credit, as a deposit into your bank account, etc.) You can let your points accumulate and at the end of the year when your fee is due you can choose to redeem some of your points as an account credit to cover the fee!
- Read the fine print. Then read it again. Then compare. When researching the best credit cards for you it is absolutely necessary to read the fine print. Not skim. Read it like you’re preparing for the SAT Reading Comprehension exam! Most cards offer rewards points, but how do they allow you to use them? Do your points ever expire? Can you only accumulate so many before you hit a maximum? What about travel fees? Are there any? Do you think you could potentially vacation away from the country at any point in the next 5 years? If so, does your card charge foreign transaction fees? What about card and account protection? Do they offer hassle-free card replacement if lost. What does that process look like? What about account monitoring? These are all important to know about before you make the jump! Research, research, research!
- Know how to use a credit card. Huh? I just swipe or insert the chip, right? NO! There are many factors that affect your credit score, and credit takes time to build. Marathon runners train for the long haul, and think about how their decisions today affect their performance two months from now. Building credit is a marathon, not a sprint, so you must think like a marathoner. There are many factors that go into a top notch credit score, and managing them well long-term will be the key to a 700+ score :
- The first and most obvious, timeliness: pay your bill on time and in full each month.
- Credit utilization: it is recommended that you only use 30% or less of your credit allowance each month. Use more and you don’t look like a responsible credit user to potential lenders, aka a credit risk!
- Length of credit history: it is best to keep an account open and active long-term. This is why you want to get a credit card that can grow and flex with your lifestyle changes. You’ll need to keep the account open for years and keep it active in order for it to positively affect your credit score.
- New credit account: When you apply for a new account (aka a hard inquiry) your credit is affected so avoid applying for multiple accounts within a short time period.
Before applying for any credit cards, do thorough research. Pick a card that works for your lifestyle and keep in mind the short term and long term pros and cons. Your credit is basically your reputation to the financial world, and it’s all you got, so treat it with the utmost respect!
What other helpful credit advice have you been given? What are some lessons you’ve learned from having a credit account? Let me know!