If you've tried to take out a loan or open a new credit account recently, you know that the days of easy credit are long gone.
So you're in the market for your first credit card? Congratulations! This is a major milestone in your financial life. Here's what you need to know to choose and manage your card successfully.
First and foremost, understand that a credit card is a loan. Instead of borrowing a set amount and repaying it in equal installments though, you're given a line of credit to use more flexibly. Credit cards come with specific terms, including the credit line or limit, which is the total amount that can be charged to the card; the Annual Percentage Rate (APR), or the interest rate charged monthly on unpaid balances; and the grace period, or number of days you have to pay your balance in full before interest starts accruing.
Credit unions, banks, and credit card companies all offer credit cards to applicants of various qualification levels. As someone just starting out with a credit card, you may be tempted by giveaways and limited-time offers on cards touting low rates. Avoid these, as more often than not, the rates will increase dramatically. Instead, investigate all the options available and find one tailored to someone with limited credit experience. Compare rates and fees, and select the card that offers the lowest for both. Also, take the time to fully understand the terms and conditions.
A secured card is a great option for those just starting out. The credit line on these types of cards is backed by funds in a savings account as collateral. Having this "security deposit" provides card users a way to wade into the world of credit cards with minimal risk. Some cards, like Navy Federal's nRewards® Secured, even offer users rewards like gift cards for purchases made on the card.
As a rookie user, stick with a single card with a manageable credit limit until you have a firm grasp on managing a credit card. Once you get your card, you can begin using it immediately. Make sure you're able to repay the amount you spend on the card and that you don't exceed your credit limit. Each month you'll receive a bill that includes an itemized report of all your transactions for the previous 30 days, as well as the total amount that you owe. Be vigilant about paying on time and in full to avoid additional interest and other penalties that will add to your debt.
It's important to understand that you aren't the only one who receives information about your card activity and payment history. Your card issuer reports all of that information to three major credit reporting bureaus who compile that data into a credit report. This information is translated into a credit score, which provides lenders and others a snapshot of how you've been managing your credit; lenders will review this information when you apply for a loan or mortgage.
Bottom line: a credit card functions as a loan; you're obligated to pay for all purchases made on the card, including any interest and penalties accrued for late payments. Pay on time and in full each month, and you'll be on your way to building strong credit for your future.