Your First Credit Card

The ultimate handbook to your first credit card

Credit Cards: The Numbers

Beating the Banks at the Credit Card Game

One of the most important keys to successful finance is managing your credit wisely. Credit cards enable financial institutions to earn fees from traders who accept credit card payments and profitable interest charges from cardholders. Financial institutions really want you to use their credit cards; therefore, to beat them at their own game, you can earn rewards, get fees waived, among many other benefits.

Since one of the major ways that credit card issuers make money is through interest charges, you should also avoid interest charges by paying your balances in full. Another way that credit card issuers make money is by charging cardholders fees. These fees can include foreign transaction fees, annual fees, or late fees. To beat them, get your fees waived by contacting your card issuers and request them to have your fees waived. If possible, let them know that you are considering closing the account due to the fee.

Additionally, the credit card industry is getting more competitive every day, and credit card companies are always willing to pay you to give their product a try. Many card issuers offer sign-up bonuses in the form of points, cash back or miles. Take advantage of this very generous offer and make sure you can manage all your cards wisely while avoiding using them to go into debt.

Low-Interest Cards? Or Reward Cards?

Types of cards have multiplied in recent years, and finding the perfect one for you can be a daunting task. The first step to selecting the best credit card is to understand the type of card you want, depending on your needs. There are two main types of credit card: reward cards and low-interest cards.

Rewards cards:

Just as the name says, reward cards allow you to earn rewards after a purchase. These cards have incentives for use, which can include cash-backs, frequent flyer points, or merchant discounts. When you use your credit card to make a purchase, you accumulate credit in proportion to the amount you spent on your purchase. According to a recent survey, 45% of Americans who plan to apply for a credit card want a reward card. However, there are several risks that come with reward cards. For instance, borrowing too much that you cannot afford to repay and losing money on late payment. Carefully choosing a reward card and avoiding the possible pitfalls by keeping your credit card debt low and never borrowing more than 20% of your annual net salary can help you improve your credit scores.

You can only qualify for a reward card if you have a good credit score, you travel frequently, you carry a low balance and you spend in restaurants, groceries, gas, and you pay your balances on time. To maximize your rewards, select a credit card that offers a higher percentage back on those purchases. If you are a frequents traveler, choose a credit card that offers three times as many points on dining and travel purchases.

Low-interest credit cards:

Low-interest credit cards are the best for you if you carry some monthly balances. You can choose a card with a consistently low ongoing interest rate depending on your financial situation. Low-interest credit cards make it easier to pay off debt since the cards can be used to complete balance transfers. To determine the right card for you, compare annual fees, introductory APRs (annual percentage rates), and the regular APRs.

An introductory period is a 0 percent APR period offered by many companies with zero-interest for balance transfers or new purchases throughout the promotional period. This is a great option for you if you are planning to make a huge purchase or if you have a current credit card. The low APR is best for people who don’t pay their monthly card bills. It helps them reduce the amount of interest paid in the long run. You need an excellent credit score to get the lowest interest rate cards.

The Checklist For Credit-Card Issuers

Steady Income

A stable income is a major factor in credit card approvals. A stable income indicates that you have all the financial means to repay your debts. Many credit card issuers break income as wages, interest, dividends, retirement benefits, rental income, or salary. Without any proof of income, credit card issuers have no way of knowing if you will be able to repay their money. C

Credit card issuers use your income to calculate your debt-to-income ratio, which helps them determine your ability to repay the debt. When applying for a credit card, remember to include any money earned outside your full-time job. And if you are 21 or older, you can include income from your spouse or partner on the credit card application.

Low Debt Obligations

Before applying for a credit card, make sure that you understand your credit report. This is an important factor in credit card approval. Remember to correct all errors that might be on your report since they might affect your credit score hence lowering the chances of your credit card approval.

The higher your credit score, the more likely you are to be approved for a new line of credit. You should have timely payments on your credit accounts. Credit cards issuers can have their own guidelines on how high your Debt-to-income ratio can be. A lower DTI ratio can help you get your credit card application approved.

Good Credit History

Lenders use your credit history to judge your creditworthiness. A long record of delayed payments suggests that your credit behavior will be similar in the future. An account with a positive payment history is the best for a credit score. Your payment history is another big factor that influences your credit card approval since it offers your credit card issuers a picture of how you pay your bills: on time, missed, or if you were sent to collections. A bad credit history hurts your credit score, and credit card issuers deem you as a high-risk customer.

The Importance Of Your Credit Score

Many people who have been denied credit cards often ask themselves why their credit scores matter. Your credit score is a number that is used by credit card issuers or lenders to help evaluate and rate your ability to repay loans. Your credit score tells lenders how responsible you are at managing your finances and when it comes to credit. FICO scores range from 300 and 850. This score is crafted by evaluating a person’s credit history, for instance, payment history, new credit, credit mix, length of credit history, and amounts owed.

A history of late payments denies you the chance of getting credit since lenders see you as a risk. The lower your FICO score, the more of a risk you are. Your credit score is also used by lenders when it comes to determining the amount of interest rate they will offer. The lower a risk you are to the lender, the lower the interest rate offered. Your credit score really matters; in fact, a high credit score motivates lenders to compete to lend you money.

Q&A: Your First Credit Card

For somebody who has never had a credit card before, what type of card would you recommend they get?

The decision of which credit card to open first can be confusing. If you haven’t had a credit card before, the best option will be the one that can help you build credit. I would say the best card to start with is a secured credit card. This type of card requires you to deposit cash security. The deposit is usually equal to your credit limit. The security deposit reduces the risk to credit card issuers.

You can use a secured credit card effectively to build your credit by using the card to make very few monthly purchases keep checking your credit score and make sure you pay your balance in full every month. It can take almost a year for you to get an unsecured credit card if you use your secured card effectively and wisely. However, there are some credit card issuers that will allow you to transfer your secured credit card to an unsecured credit card.

For first-time credit-card holders, what are the biggest mistakes they make when they get their cards?

Many people get their first credit cards and often misuse them by purchasing items they wouldn’t have been able to buy if they had cash. The other mistake is not reading the terms and conditions of the credit cards. Reading the fine print is very important since some credit card issuers can look very attractive with a low introductory rate, however, if you carefully read the fine print, you will see that there is a fee charged to transfer the balance and there is a specific time when the interest rates will hike dramatically. Avoid making a late payment since it can end up showing up on your credit report and damage your FICO score.

Can a person have too many credit cards?

Having numerous credit cards can help you boost your credit score. On the other hand, having too many credit cards can be very risky. If you are a beginner in the world of credit cards, you should have one or two credit cards. However, the number of credit cards a person can have depends on their credit score. People with an excellent credit score can have an average of seven cards, which consists of opened and closed accounts. Several credit cards can help keep utilization rates low since you can spread out a purchase across those cards. Be careful not to spend too much than what you earn; you might end up with a lot of debt if you have several credit cards.

For someone new to credit cards, are rewards cards a smart choice?

Reward cards offer a small return for every purchase you make using your card. When you use your credit card to make a purchase, you earn points, miles or you get cashback. Reward cards are not simple. They have higher interest rates than the other credit cards. This means that you should not carry a balance on a reward card. Make your payments on time. Don’t go chasing rewards and bonuses because you can end up with a credit card balance that you won’t be able to repay.

How would you advise someone who can’t afford to make their credit-card payments?

You can create a tough situation if you fail to make your minimum payment on time. Late payments not only have penalties but also increase your APR and cause harm to your credit score. In case of a missed payment, you should submit as soon as possible. If you cannot afford to pay your credit card, the wisest thing to do is to contact your credit card issuer and try to explain your situation. They might help you work on a repayment plan, or they might give you financial advice. As you have worked out something with your credit card issuer, make the payment your priority. Don’t miss on a single payment.

What things should or shouldn't a person buy with their credit card?

The best answer is to know your credit limit. I would recommend a first-time credit card holder to be very careful not to exceed the maximum outstanding balance on their credit card; this will help them stay out of debt and build an excellent credit score. If you don’t know your credit limit, check your billing statement or call your credit card issuer. You can utilize your credit card to purchase anything as long as you can afford to pay back every month. Make sure to stick to the minimum monthly payment to avoid debt build up and a bad credit score.

Steps To Take When Your Credit Card Application Is Denied

If you have applied for a credit card, you will know right away when you get approved. However, when your application is denied, it’s a different situation. Credit card issuers will rarely inform you immediately that your application has been denied. They will send an adverse action letter within 7 to 10 days of your application to give details on why your credit card application has been denied.

Typical reasons for your credit card denial include:

High loan balances
High credit card balances
Low income
Several inquiries on your credit report
Too many credit cards

The adverse action letter will mention your credit score in case it was used in the decision-making process. You have the right to request a free credit report that was used in making the decision within a span of 60 days. You should follow up on this, especially if the adverse action letter cites some negative things in your credit report that you weren’t aware of, or if your credit score is lower than you thought.

Inaccuracies are common. In fact, a 2012 FCT study revealed that 1 in every 4 consumers have errors in their credit reports that affect their credit scores. In case you feel that the denial may have been based on inaccurate credit score, follow the instructions detailed in the letter, and file a dispute with the consumer credit bureau. You will have to indicate all erroneous charges or any other errors on your report, attach a written document disputing the charges, and include the necessary paperwork as proof.

It is also important to double-check the information you provided to the credit card issuer for errors that you may have made that make you seem less creditworthy than you actually are. For instance, you could have stated that your annual income was $4,000 while you meant to say $40,000. You may have also reported that your monthly rent cost $5,000 when you meant to say $500.

Sometimes, not the fat-finger mistakes will trip you up. You should also know what is considered as income. Most credit card issuers don’t specify how you should report your income when applying for your credit card. Therefore, most applicants only report their independent income. However, an amendment in the Credit Card Act allows credit card applicants above 21 years to report any earnings themselves. This provision also allows you to report your partner’s income and also qualify for credit. If you discover you made a mistake while filling the application form, call the credit card issuer’s customer service line and talk to a representative who can help you amend the error.

Find the Issues Harming Your Application

Anyone whose credit card application has been denied has an opportunity to reverse the decision. To do this, call the reconsideration lines that are operated by the card issuer. If you haven’t received the adverse action letter, talk to the customer care representative, and request for information on why your credit card application was denied. The representative will also give you a chance to argue your case and why the decision should be reversed. Remember to always be polite and calm when on the phone. Be prepared with a rationale to grant you the card, for instance, in case your credit card application was rejected because of your limited credit history, you can present the issuer with recent bills that prove you are capable of paying on time. Such explanations and providing other supportive documents are essential in helping your case, but they won’t always help reverse the decision.

If the reason for your credit card rejection is because of a low income, changing that can take some time. However, for most of all other reasons listed on the adverse action letter for your denial, there are ways that you can improve your credit and also increase the chances of getting your next credit card application approved.

The most important thing that you should first do is to pay off all delinquent balances. Delinquent balances will continue to negatively affect your credit score while costing you more money. In case you’re experiencing problems in paying off the credit card balance, transfer your credit card balance to a 0% APR card to stop accruing high interests while you handle your current debt.

Consider a Co-Signer

You can easily get your credit card application approved if you have good credit. However, if you have had some credit problems in the past, or if you don’t have credit at all and you’re trying to establish your credit, it can be challenging to qualify for a credit card.

However, applying with a co-signer may help you qualify based on the other person’s good credit history and score. Keep in mind that the co-signer is considered a co-applicant. Therefore, both parties are obligated to repay any credit balances or charges that accrue.

12 To-Do’s With Your Credit Cards

Try always to make more than the minimum payment.
Know when you can use your credit card to pay interest-free.
Note your payment due dates.
Apply for credit cards only when you have a planned need for them.
Keep your credit card payments below 10 percent of your income.
Take advantage of your credit card extras, such as credit score tracking.
Use credit card rewards like free gas, cashback, and point rewards to save money.
Clear your credit card debt if you plan to apply for a major loan.
Familiarize yourself with debt consolidation even before you need it.
Make it a habit to check your credit card statements on a monthly basis.
Consider automating your payments to save money on interest fees and boost your credit score.
Seek professional help for options to eliminate debt when bills get high.

12 To-Don’ts With Your Credit Cards

Never attempt to use your credit as a substitute for your income.
Avoid any type of cash advances.
Never miss payments by more than a month.
Don’t open an account just because you have received an offer.
Don’t spend money that you can’t afford to pay back.
Never share your credit card details to third parties.
Don’t apply for new credit cards within a 6-month period.
Never ignore automated fraud protection calls.
If you’re having trouble paying, never hide from your creditors.
Don’t get lured into settling your debt if you don’t want to harm your credit.
Never assume that a specific debt solution that worked for a friend or relative will fix your debt problem.
Don’t pay the monthly minimum and continue racking up debt.

A Quick Look At Student Credit Cards

If you are enrolled in college, and you hope to declare your financial autonomy by acquiring a piece of plastic, then a student credit card may help you. There are several credit card issuers that can offer you one. Student credit cards are specifically designed for individuals new to credit. These types of credit cards often have rewards and bonuses that are geared towards your lifestyle. However, sometimes, they may have lower limits and higher penalty fees compared to other credit cards.

You have to be 21 for you to qualify for a credit card. However, the Credit CARD (Credit Card Accountability Responsibility and Disclosure) Act of 2009 allows those below 21 years to qualify for a credit card if they can prove that they have an independent income, or if they have a co-signer like a parent who can take responsibility and pay the debt.

Therefore, if you’re a college student and responsible with money, a student credit card can help you build good credit which can help you later on in life when you decide to apply for an auto loan, mortgage, or a business loan.

Glossary: Credit Card Terms to Know Before You Apply

Transaction Fees and Other Charges

These are additional charges that are included by your credit card issuer for various reasons, including using your credit card to get money from ATMs, making a late payment, or exceeding your credit limit.

Finance Charge

This is the extra money that you will pay in addition to the money borrowed. These charges include interest charges and other fees. Your credit card issuer will calculate your monthly finance charge.

Late Payment Fee

If you have a balance on your credit, you will have a minimum of 21 days after your billing cycle. In case you make the payment past the due date, or you make a payment that is less than the minimum payment, you will be charged a late payment fee.

Cash-Advance Fee

This is the fee that your credit card issuer charges you for accessing the cash credit line on your account, either through a bank’s teller window or through an ATM. The fee is normally 3 percent of the total amount withdrawn.

Annual Percentage Rate (APR)

This is the yearly interest that is used to calculate how much in interest will be placed on your statement each month you fail to pay the balance in full by the due date. The APR is determined partly by your credit score and credit history. Your creditor will assign APRs depending on how risky they think you are. Therefore, a low credit score equals a higher APR.

Credit Limit Increase Fee

Your credit limit is the maximum amount that your credit card issuer allows you to spend. If you want your credit limit to go above that amount, you will have to pay a credit limit increase fee.

Balance Transfer Fee

Moving your unpaid credit card from Company A to Company B if company B offers a lower APR is a smart move. This will help you pay off the balance within a shorter time and without accruing interest rates. However, Company B will charge you a balance transfer fee for paying off the money you owe Company A.

Over-the-Credit-Limit Fee

This is a fee charged whenever your credit card balances surpass your credit limit. When you make a purchase that will put you over your limit, your credit card issuer will permit the transaction, but at a fee.

Annual Fee

This is the yearly charge that a credit card issuer adds on top of the consumer credit card statement for managing their accounts.

Grace Period

Grace periods are the days and weeks when there are no charges on your new credit card purchases. This period often starts from the first day of the billing cycle and ends after a number of days, usually 21 to 25 days.

Additional Resources

CFPB Know Before You Owe Credit Cards page

CFPB (Consumer Financial Protection Bureau) has come up with a shorter and simpler credit card agreement which explains to consumers all the terms. This guide will help you to understand your credit card agreements better.

FTC Using a Credit Card page

Regardless of how you use your credit card, you have rights as well as responsibilities. This FTC page explains how you can use your credit card safely to avoid harming your credit.

FTC Credit and Loans page

This FTC page offers helpful information that will help you in making decisions regarding your budget and the terms offered. If you’re a first-time credit card applicant, this page will give you the right tips.

Federal Reserve’s 5 Tips on Getting the Most From Your Credit Card

To ensure that you get the most from your credit card, the Federal Reserve has explained 5 do’s and don’ts that you can use to manage your credit card account.

FTC Coping With Debt page

If you’re having problems paying your bills and your creditors are already sending notices, this FTC page gives self-help tips by using realistic budgeting. It also contains information on when to consider debt relief services like debt settlement, debt consolidation, credit counseling, or bankruptcy.

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