It’s easy to get overwhelmed when applying for your first credit card. What’s an APR? What’s a sensible credit limit? Don’t panic! Blogger Meagan McGinnes shares how she tackled the credit card application process.
We’ve all heard the story of the girl who cried broke.
It’s a cautionary tale I’ve been told since childhood. Girl gets credit card. Girl racks up piles of debt. Girl can’t pay it off, tanks her credit score, moves back in with mom and dad and lives off a diet of ramen for the rest of her life. Is it any wonder that I’m almost 25 and still only use my debit card for all major purchases?
A fable is just that: a blanket fictional account to teach a moral lesson to the masses. It shouldn’t be used as fact. Fact: I’m a responsible adult who has managed a budget successfully the past year, including getting an apartment and traveling. So staying clear of credit cards as if they’re a black hole that can suddenly drain me of my judgment is not only juvenile but actually hindering more than helping.
Establishing credit in necessary if one wants to reach future adult life milestones—like buying a new car or a new home. Easy, right? Applications with “deals you don’t want to miss,” that “earn your triple the points” or have “no interest fees for a year” have piled up in my mailbox for the past two years. Choosing a card should be simple.
But it’s not. It can actually be pretty confusing. Every card is different, and you have to read the fine print—or what was once a fable might become your reality.
I recently applied for my first credit card. Here’s what I learned.
Understand Your Options
There are two kinds of credit cards: secured and unsecured. Secured cards, backed by a cash deposit, are a better option for those who haven’t built substantial credit because it removes any issue of nonpayment for your cardholder (which means you’re actually more likely to get a card). When you build up your score, you can transition to an unsecured card once your balance is paid off.
Unsecured cards are based on your income level and credit history. Because you aren’t putting down any of your own money as a deposit, there’s a bigger risk for cardholders not to get their money back (so your first card’s limit will most likely be minimal).
Don’t Go on a Card Application Spree
An analysis of your new credit makes up 10 percent of your FICO score, and multiple credit inquiries drag down that score. This means if you’re looking into new cards and applying for a bunch to see which will give you the best rate, this might hurt you in the long run.
What else plays into your FICO score? Your credit utilization (30 percent), payment history (35 percent), length of credit history (15 percent), and types of accounts (10 percent).
Check Interest Rates and Fees
Your periodic interest rate is calculated by dividing your annual percentage rate (APR) by 365. A good APR rate usually ranges from 13 to 20 percent. In 2016, APR rates for travel reward cards averaged 15.9 percent, according to valuepenguin.com. The average cash back APR rate was higher at 20.9 percent. To figure out your interest accrued for the month, multiply your average daily balance by the periodic interest rate and the number of days in the month.
Pay Your Balance in Full Whenever You Can
The most important factor impacting your FICO score is your payment history. Paying the minimum balance will not hurt your score, but paying your balance in full and on time will have a positive impact on your wallet because if you do so by the end of your billing cycle, you won’t have to pay interest. Some cards have 0 percent interest on purchases or balance transfers for 12 to 18 months. But beware: An introductory rate may start as a fixed low APR for a set period, but once the term is up, the APR reverts to a variable rate.
Be Honest About Your Spending Habits
Will you use your card for everyday expenses like gas or groceries? Are you a foodie who goes out to eat every weekend? Are you a frequent traveler? Depending on your spending habits, you’ll want to look for a card offering the highest cash back in those categories. For travelers, also look for a card featuring no foreign transaction fees, a good miles-to-point value, or a variety of ways to redeem points for travel. If you’re going to spend money, you might as well get something back in return.
All in all, like any decision regarding your finances, be armed with the information you need to make informed decisions. This means not only reading helpful guides to adulting (like this blog), but also asking for help from other (financially responsible) adults in your life. Whether it’s your parents, family, or friends who are in healthy financial situations (meaning they’re confident in their ability to pay and understand their fiscal responsibilities, not that they’re loaded), now is not the time to be too proud.
In the words of Gretchen Weiners: “You wouldn’t buy a skirt without asking your friends first if it looks good on you.” Same applies here.
Meagan McGinnes is a freelance writer with interests in New England culture, locally sourced food, the environment, fitness, and storytelling. She’s a foodie who shares her love of snacks as a senior reporter at Project NOSH—a trade publication by BevNET that covers natural, organic, healthy, or sustainable packaged food companies and products. Follow her @meaganmcginnes.
Any third-party resources or websites referenced above are not under Society of Grownups control. Society of Grownups cannot guarantee and are not responsible for the accuracy of the resources, websites, or any products or services available through such resources or websites.
While Society of Grownups hopes the information is useful, it’s only intended to provide general education. It’s not legal, tax, or investment advice, and may not apply or be useful to your specific financial situation. If you need recommendations geared to your personal financial situation, schedule time with a financial planner.