7 Things to Know Before Getting Your First Credit Card
March 16, 2022
Credit cards come with many potential benefits, including everything from increased purchasing power to protection against fraud. However, making the most of these benefits hinges on one thing: responsible credit card use.
That’s why it’s important to inform yourself about how credit cards work before adding one to your wallet. It’s also why we created this guide.
Below, you’ll find seven things you need to know about credit cards—and how to use them wisely.
1. What Are Credit Cards?
Credit cards are physical cards that can be used to make purchases and pay bills both in stores and online. Some credit cards can also be used to withdraw cash.
When you open a credit card, you are given a set credit limit by the credit card company. This is the amount of money you’re allowed to spend. As you charge things over the month, your available credit is reduced.
There are two main types of credit cards: secured and unsecured. Usually issued to borrowers with poor or no credit, secured credit cards are backed by an initial cash deposit, which serves as collateral if you can’t make payments. Your deposit is typically equal to the card’s credit limit.
2. How Do Credit Cards Work?
When you use your credit card, the details of your purchase are electronically sent to the merchant’s financial institution, which communicates with the credit card network and your card issuer to verify and approve (or decline) the transaction based on your credit limit.
When transactions are approved, payments are made to the merchant financial institution from your available credit. At the end of the month, you’ll receive a statement inventorying all your transactions. This statement will also show your balance, the minimum payment due, and the due date.
However, if you carry a balance over to the next month, you will be charged interest. The amount you pay depends on your credit card’s annual percentage rate, AKA “APR.” This comprises your interest rate as well as any annual fees and other costs.
4. What are the Benefits of Credit Cards?
In many cases, credit cards are a safer and more convenient payment method than cash and checks. They can even save you money if you pay your credit card bill on time every month and take advantage of promotions, rewards, and incentives.
Credit cards also offer a number of consumer protections. Plus, they’re universally accepted—which comes in especially handy when you’re traveling abroad.
One of the best parts about Credit Cards is that assuming you use them responsibly, they can also help grow or boost your credit score.
But to harness the full power of these benefits, you have to use your credit cards wisely.
5. How Can You Manage Your Credit Card Wisely?
Getting your first credit card can feel liberating. However, if you don’t use your credit cards wisely, they can turn into a trap. Spend over your limit (or more than you can afford) or fail to pay on time, and you’ll quickly begin to rack up interest, penalties, and other charges.
The good news? There are some simple things you can do to use your credit wisely—starting with the following tips:
Don’t charge to the limit. Many experts recommend trying to stay within 30 percent of your limit.
Don’t just pay the minimum. While paying your full balance each month is the ideal, it’s not always possible. If you can’t pay the full amount, pay more than the minimum to avoid paying a lot of interest.
Pay on time. Avoiding late fees won’t just save you money; it will also help you create and/or maintain a positive profile on your credit report. Automatic payments make it easy to pay on time—just make sure you’ve got enough in your account, so you don’t get slammed with hefty insufficient funds fees.
Have one or two cards. Multiple credit cards can be hard to track. To avoid getting into trouble, choose one card with the most desirable features. It can also be helpful to have a back-up.
Monitor your credit report. You’re entitled to a free annual credit report from annualcreditreport.com. Review it carefully for accuracy. Notice anything off? Report it immediately. There could also be additional options to help monitor your credit report that your financial institution may offer. One example of this is “My Credit Score.”
Know the terms. Keeping up with your credit card’s fees, rates and rate increases, and other details can help you be a more responsible user.
6. How Does Credit Card Spending Impact Your Credit?
Credit cards have a significant impact on your credit score as they are an indication of your ability to manage money and pay off debt.
In addition to taking your balances and payment history into account, your credit report also factors in your available credit, AKA your credit utilization rate. This is the percentage of credit used compared to your available credit.
Other credit card-related factors impacting your credit include the length of your credit history, types of credit used, and new credit.
One note on the latter? While opening a new credit card can temporarily ding your credit, it’s ultimately an opportunity to build your credit over time. This means you’ll qualify for higher credit limits and better rates on everything from credit cards to car and home loans.
7. How Do You Build Credit with a Credit Card?
Unfortunately, little to no credit history can be just as detrimental as bad credit to your credit score. This is why it’s important to build a credit history. Opening a new credit card is an easy way to build credit with everyday purchases you’d already be making.
And as long as you understand how credit cards work and follow the tips above, you will immediately begin establishing credit, which can open the door to a brighter financial future.
To learn more about building credit fast with a credit card, click below!