What to Know Before Applying for Your First Credit Card – Forbes Advisor
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Apply for a credit card? Not so fast. For people looking for a card for the first time, there are a few things to know, like how credit actually works, what to do without a good credit history, and what to look out for when choosing a card. Here are the most important things to know before hitting that submit button.
Understand the basics of credit
Buying something on credit means having it right away with the confidence that it will be paid for later. Just like other types of loans, a credit card offers flexibility, but has consequences if repayment confidence is broken. Because a credit card allows users to temporarily use money that is not theirs as if it were their own, it is totally different from other types of electronic payment like debit cards and credit card apps. mobile payment. It’s important to note that it’s not uncommon for a credit limit (how much your card allows you to spend) to be more money than someone actually has available or in the bank. This is what makes buying on credit a double-sided card.
Know your credit history
A credit history indicates reliability as a borrower and is built over time based on the reliability with which a person pays what is owed to them. Credit history details are recorded by the credit bureaus in a credit report and summarized by a three-digit number called a credit score. The higher the score, the better the credit.
Credit card issuers look at these credit history indicators and other factors to decide if someone seems reliable enough to lend money. Using a credit card is the easiest and most common way to build a credit history and therefore presents a bit of a trap for newcomers to credit.
What to do if you don’t have credit
While it’s common not to have a credit history prior to a first credit card, it’s worth checking with a credit bureau to see if another form of borrowing, such as a student loan, has already initiated a credit history.
For those who are in the process of building (or rebuilding) a credit history, many credit cards will be banned until stronger credit can be established. Instead, many companies offer “starter” cards which are easier to obtain and can help open up better options later. These are often secured credit cards, which require a large initial deposit while still providing credit to the user, meaning responsible use will positively contribute to a credit history.
Another possibility for those without a history is a card that allows a trusted friend or relative with good credit to co-sign, which puts the co-signer on the hook for any debt they cannot. pay. As with a deposit, this “backup” greatly reduces the risk assumed by the credit card issuer and, in turn, increases the chances of approval. Another similar option is to be added as an authorized user to a friend or family member’s account.
Those wondering where to start should be aware that banks that already have existing relationships with credit card applicants may be more likely than others to approve an application. A bank that can see the banking history of someone they could give a credit card to can see how responsible bank accounts are being used. Credit cards offered by department stores and retailers are also known to have more lenient approval standards. Student credit cards, available only to students, can often offer relatively favorable terms without requiring a credit history, deposit, or co-signer.
Know how to read a Schumer box
Once they have purchased a card, consumers are likely to come across “boxes” or tables, which disclose the terms of a credit card in a standardized format. Knowing what the information means is essential to choosing the right card. The Schumer Box is named after Senator (then Congressman) Chuck Schumer, who pioneered legislation requiring banks to be more transparent. Among other figures, the Schumer Boxes always include:
- The annual percentage rate, or APR, which indicates the amount of interest a consumer will be charged on money owed if balances are not paid on time. It is also indicated whether this rate is variable (subject to change over time) or fixed.
- The method used to determine the amount of interest due
- The exact number of days in a billing cycle (this is usually around a month)
- The cost of an annual package, which some cards forgo
- A penalty APR and penalty fees: a high interest rate on sums due and additional costs incurred if incomplete payments do not meet a mandatory minimum
- A list of transaction fees for actions such as cash advances, balance transfers, and foreign transactions
To know itself
Many people find it difficult to spend borrowed money responsibly, despite the best of intentions. Today, nearly half of adults in the United States have credit card debt. Credit card issuers actually benefit the most from these customers, who end up spending much more than the value of what they originally bought because of interest payments and penalty fees.
As a result, the universal wisdom about credit cards is to treat them as a convenient way to make normal payments, rather than a line of credit for things you couldn’t otherwise afford. Despite their ease of use (and usefulness for credit), credit cards are one of the least cost effective ways to borrow money.
Those with reason to be concerned, perhaps those who still struggle to repay their friends or struggle to buy on impulse, should proceed with caution. Even something as minor as spending a high percentage of a credit limit (also known as usage) can hurt a credit score (ideally aim to spend less than 30% of a limit. ).
For those who think some bumps in the road are inevitable, a card with as low an APR as possible – rather than a card that offers special rewards or waived fees – is more likely to provide the best bang for your buck. Conversely, for those who are confident of making full payments on time, accepting a high APR won’t be as likely to hurt and may help prioritize other benefits. The benefits are most often immediately canceled upon the accumulation of any significant interest.
Beware of gadgets, promotions and the fine print
The variety of benefits offered by credit cards now makes it easier than ever to find one that rewards spending and lifestyle. But keep in mind: a lot of effort and research goes into determining both the benefits that seem most appealing to consumers and the costs that consumers are most likely to underestimate. Often times, some of the more mundane perks actually offer the best value. Carefully calculate the actual reward a card will provide. Using previous spending history is a great way to do this.
With cards that focus on a specific reward or offer cash back for specific purchases, it is advisable to be clear about how much will actually be spent in the category. If you’re changing your spending habits to justify prioritizing a particular benefit, the card is probably not for you. Remember that every credit card is a trade-off between the pros and cons, especially with starter cards, and it is important to do your due diligence to fully understand its terms.
Don’t overdo your application
When applying, an issuer will ask questions about the life and finances of an applicant. It might be tempting to overestimate income, underestimate debt, or mislead about other aspects of finances in order to appear more “creditworthy”. Please note: the penalties for lying on a loan application can lead to prison terms and heavy fines. Because a credit card application is a legal document, being accused of fraud for lies or exaggeration remains a possibility.
For those who know they will be responsible credit users, starting as early as possible means that future applications for auto loans, mortgages, or other forms of borrowing will all be smoother sooner. The length of time that an applicant for other lines of credit has proven their creditworthiness will be important for any institution that lends money. Time is the biggest advantage for young credit card applicants. For those who are not that young, the weather is the biggest drawback, so don’t wait too long to get started.