Getting Your First Credit Card
Smart credit card usage can help build up your credit score and history, preparing you for bigger financial moves in the future.
When I got my first credit card in 2003, I used it only to make small purchases, such as my Internet service, which was about $25 a month at the time. Then, over the holidays one year, I used it to buy pricey Christmas gifts for my family that I otherwise wouldn't have been able to afford. I also made a couple more not-so-smart purchases -- including several shopping trips to the mall to buy clothing I wanted, but definitely didn't need -- using the card. Unfortunately, I could only afford to make the minimum payments, and it took me nearly two years to pay off the balance. When I finally did, I thought about the hundreds of dollars I'd paid in interest, and it was enough to make me take the card out of my wallet so I wouldn't be tempted to use it so carelessly again.
I’m not alone in these experiences. Plenty of college students and twenty-somethings manage to rack up thousands of dollars in credit-card debt without any real means to pay it back. Here's how you can get your first credit card and use it constructively to lay the foundation for a successful financial future:
Cards That Don't Play Hard to Get
Credit card options may be limited for those with little or no credit history. Consider talking with a representative at your personal bank first to find out what credit options they offer, suggests Linda Leitz, a certified financial planner based in Colorado Springs, Colo. "Sometimes if you get a credit card through your bank [where you already have a checking or savings account], you may be able to get a bundle deal that you wouldn’t find online or through another banking institution," she says. At PNC, for example, anyone applying for a PNC Points Visa credit card who also has a qualifying checking account with the bank gets a 75% bonus on any rewards points earned.
Retail credit cards are generally easier to qualify for and will help you establish a credit history just like a major credit card. However, most retail cards, such as Target’s REDCard or The Home Depot's Consumer Credit Card, only allow you to make purchases at that specific retailer or other stores it owns. Regardless, using a retail credit card can prepare you for bigger expenses later in life, such as a car note or a mortgage payment, Leitz says, and if you're going to use one, "it's wise to register for a card at a store you frequent."
Charnika Plenty, 29, of Takoma Park, Md., did exactly what Leitz suggests. She applied for a retail credit card at Banana Republic a couple of years ago because it's a store where she regularly shops for work clothes. Plenty qualified for the store's Luxe Visa card because she had a solid credit history. With the Visa card, she's able to earn rewards points and an additional 15% off store purchases, and she can use it at any other store that takes Visa. Plenty says the card has helped her maintain a good credit score "because I'm good about paying my bill and keeping the balance low."
Warning: Many retail cards have low spending limits and high interest rates, says John Ulzheimer, president of consumer education for SmartCredit.com. For example, at Best Buy, the annual percentage rate on their Reward Zone card ranges from 24.24% to 27.99%. Failing to make an on-time payment for even the smallest purchases using a retail card can be costly. "[Retail credit cards are] a stepping stone until you can build up enough credit to graduate to a bigger card," he adds.
If you have little or no credit history, you might also consider a secured credit card. This type of card requires the cardholder to make a cash deposit equal to the card’s credit line, says Greg McBride, a senior financial analyst for Bankrate.com. The deposit is used as collateral toward your account, and any unpaid money that's overdue will be deducted from it, according to Credit.com. This helps remove the risk of default for the issuer and overspending for the cardholder, McBride adds. "Using a secured credit card modestly and paying the balance in full each month is key in eventually transitioning to an unsecured credit card where a cash deposit isn't required." Also, payment activity (or lack thereof) on a secured credit card gets reported to the major credit bureaus and can impact your credit score and history just like an unsecured credit card does.
Check out our slide show, 7 Great Credit Card Picks for Students and Young Adults, for Kiplinger's top credit and retail card picks for first-time cardholders. To research additional credit card options, visit sites such as Mint.com and Bankrate.com, suggests Ulzheimer. "They do a good job of explaining the types of credit cards that best suit you based on your credit history -- from just starting out to rebuilding your credit."
The Fine Print
Some things you'll want to consider with a first credit card, says Beth Kobliner, author of Get a Financial Life: Personal Finance in Your Twenties and Thirties, are the specific terms of the credit agreement, including annual fees, low introductory interest rates (which will likely skyrocket after a fixed period of time) and rewards benefits. Obviously, you'll want to try to avoid cards with excessive fees, such as balance-transfer and late-payment fees. These can really add up, so be sure to read the actual credit card agreement before signing.
Alfons Prince, 29, of Asheville, N.C., remembers all too well how the allure of a low introductory rate led him to make poor spending choices. He applied for two credit cards, a Visa and a MasterCard, during his freshman year of college in 2000 -- back when credit card companies were allowed to set up shop on university campuses with little regulation. One of the cards he was approved for had an introductory interest rate of 5%, and Prince used it for purchases both big and small. However, when the interest rate jumped to more than 10% after only 60 days, he says, shock set in because he couldn't afford his monthly bill. It took Prince more than a year to pay off the cards entirely. To avoid an expensive surprise, says Leitz, card applicants should always "know upfront what fees and charges are associated with the card."
For rates, aim for 15% or lower. Unfortunately, the best rates are reserved for folks with the highest credit scores -- not typically those of us just starting out. If you can't snag a great rate right away, keep trying to boost your score and check with your card issuer every year or two to see if you can get your current rate lowered.
Remember, credit cards aren't necessarily bad. It's how you use them that can negatively affect your credit score. When used properly, credit cards can help lead you down a solid financial path toward renting an apartment, being approved for a new-car loan, and buying a home.
Except for in an emergency, you should never buy anything with plastic that you won't be able to pay off when your statement arrives, Kobliner advises. Another tip for keeping your credit card spending in check: Kiplinger's Janet Bodnar recommends immediately deducting any credit card purchases from your checkbook balance. That way, when your bill is due at the end of the month, you'll have already accounted for those expenses and will be able to pay the bill in full, avoiding late fees and dings to your credit score.
Keep in mind that negative credit-report information follows you for seven years, Ulzheimer adds. Defaulted credit cards and late payments can be problematic during major life milestones, such as when you try to finance a first home, he says. Using a credit card frivolously during early adulthood may not seem like an immediate concern, but it could seriously hinder your buying power later in life.