Getting your first credit card can be a daunting task. After all, there are hundreds of credit cards on the market and countless horror stories of their abuse. When you take the first step towards applying for a card, it is important to know what you are getting yourself into so you can protect yourself from rookie mistakes.
Four things to know before opening a credit card account
You should have at least a basic understanding of how credit cards work before applying for one. The most important concepts include:
- Borrow money with credit cards.
- How interest applies.
- General terms and conditions for credit cards.
- Applying for a card.
Borrow money with credit cards. Although they are similar in appearance, a debit card is quite different from a credit card. When you shop with a debit card, the money comes straight from your checking account and you don’t borrow money. If your account does not have sufficient funds, your debit card transaction will be denied.
But when you make a transaction with a credit card, you are using the bank’s money, not your own. The bank runs the risk of paying you back the balance as you don’t need to put any collateral on to get the loan unless you use a secured credit card. It’s not like secured home or car loans where your property can be repossessed for non-payment.
If you do not pay back the balance on your credit card, the bank will not be able to take back your purchases. So the loan that a credit card issuer grants is a much greater risk than a secured loan. Credit cards therefore usually have a significantly higher interest rate than secured loans.
How interest applies. If you repay your credit card balance in full and on time every month, you will generally use the bank’s money free of charge, as you will not incur any interest. However, if you keep a balance from one month to the next, you will be charged interest based on the effective annual interest rate on your card. Credit cards usually have one average effective annual interest rate of 17 to 24 percent, according to US news data.
General terms and conditions for credit cards. When applying for a credit card, take the time to read the fine print in Terms and Conditions.
“It’s important to read these terms,” says Erik Paquet, editor-in-chief of AwardWallet, which helps consumers track their loyalty points and miles. “A credit card contract is a contract and, like any contract, is binding. It defines everything for which you as the cardholder are responsible in this regard.”
The terms and conditions contain important information that you agree to when using the card, not just the promotional copy that sounds so inviting. You will find information about the APR of the card, the fees incurred, how rewards work, and other details about the cardholder’s benefits.
Applying for a card. The types of cards you can be approved for and the interest rate you will be charged will depend on your creditworthiness. If you have no or poor credit, there is no point applying for a card that requires good or excellent credit. On the other hand, as you build up your bankroll, you will eventually have a wider range of cards to choose from and a more attractive interest rate than consumers with a lower credit rating.
Applying for multiple cards at once is usually not a good idea, as applying for many new loans at once can temporarily affect your creditworthiness.
“Submitting multiple credit card applications at the same time raises red flags in the underwriting process,” said Pete Klipa, senior vice president of creditor relations at the National Foundation for Credit Counseling. “It can seem like you’ve overwhelmed yourself.”
Look for credit cards that offer pre-approval that can give you an idea of whether you will be approved with just one gentle credit check it doesn’t affect your creditworthiness. Then apply for a card or two that you are reasonably sure will be approved. If you’re rejected or given a higher or lower rate Credit limit than expected, get a copy of yours Credit report to see if there are any issues that you need to correct.
How to analyze a credit card offer
When applying for a credit card, answer the following questions:
What rate do I get? You may not qualify for the lowest advertised rate, so check out those Range of APR Offered by the card. Your APR is determined by your risk, which is based primarily on your creditworthiness.
Do I get rewards for using this card? Many cards come with some type of reward or incentive to use your card. These rewards are only profitable if you pay off your card in full and on time. So don’t be tempted to spend more than you can afford. However, when you run out of funds, using a credit card for your purchases can pay off. So compare the rewards of the cards you are considering.
Is there a Sign up bonus? Reward credit cards can offer accelerated rewards to attract new customers. The credit card industry is extremely competitive and issuers are fighting for their business. Some offer an incentive for extra cash, miles, or points if you spend a certain amount of money in the first three months as a cardholder.
Is there an introductory offer on the card? Many cards offer new cardholders a zero percent APR Period for purchases, balance transfers, or both. These offers can be beneficial, but make sure you have all of your balance cleared before the introductory period ends.
How long is the grace period? the Payment term is the interest-free period that a lender grants credit card holders. It extends from the end of the billing cycle to the payment due date if no balance is carried over from the previous billing cycle. The longer the grace period, the longer you don’t have to pay any fees. For cards with a grace period, this must last at least 21 days.
Is there an annual fee? Cards with Annual fees can add value when you can take advantage of rewards and benefits. However, many cards are available with no annual fee, so you should consider whether the value outweighs the cost.
How to use a credit card wisely
Follow These Basic Rules For Using Credit Cards To Avoid The Worst Of Debt And Late Payments:
Try never to charge your credit card more than you can repay in full at the end of the month. You may want to set your own monthly spending limit based on what you can afford when the bill is due. If you do not pay the entire month’s statement in full, you will be charged interest. By paying the monthly balance, you can avoid interest charges.
If possible, keep debt down. If you can’t pay your credit card bill in full every billing cycle, all is not lost. But it is still important to exercise caution. Just because you have a credit limit doesn’t mean you should be spending that much money. In fact, experts say you shouldn’t be using more than 30 percent of your available balance. Keeping your debt in check can also improve your credit score.
Always pay on time. If you are late with a payment, you will be charged a late payment fee and other penalties may apply depending on the level of default. Your credit score will likely go down if your payment is delayed by more than 30 days and reported to the credit bureausbecause one of the most important factors in determining your creditworthiness is your payment history. Conversely, if you make all of your credit card payments on time, your credit score should go up if you prove your trustworthiness. To ensure that you make all of your payments on time, set up email or SMS reminders for your due date. You can also set up automatic monthly payments.
If you get rejected
As a new credit card user, you may not have a lot of credit history and this can limit the number of cards you can be approved for. When faced with a rejection, you have several other options:
- Apply for a credit card that has a lower credit rating or one that is specifically designed for people with no or poor creditworthiness.
- Ask your bank or Credit union via available credit cards. If you have one checking account, then you already have a history with your financial institution, so it is more likely that they will offer you a credit card.
- Get a secured credit card. These cards work just like a standard credit card, but require a refundable deposit to be paid before an account can be opened. This deposit usually acts as your credit limit. Cardholders must make at least the minimum payment each month and interest will be charged unless they settle their entire bill in full. Most importantly, a secured card can report your payment history to the three major consumer credit bureaus so that if you manage your account responsibly, you can build up your credit. If you build a history of on-time payments, you can qualify for an unsecured credit card.
- Consider Credit cards for students. There are several cards that are marketed only to college students. They may have lower credit limits and higher interest rates than general cards, but they allow college students to get into the credit card market and build a credit history.