When you get your first credit card, one of two things can happen:
- You keep your new credit card’s balance paid down and make payments on time month after month to build up your credit.
- You max out the card and face expensive finance charges that weigh down your credit utilization ratio and make building credit difficult.
Option 1 can launch your journey to financial independence. With good credit, you'll be able to access low annual percentage rates (APRs) on mortgages, auto loans and better credit cards with perks or no annual fees.
Option 2 could wreck your credit score because you're more likely to make late payments and carry large balances. You could pay higher fees and higher interest rates or get loans declined.
How to get your first credit card
Getting your first credit card may be as simple as submitting a credit card application online and waiting a few seconds for a decision. But for most first-time cardholders, applying isn't this simple because most cards require you to have an established credit history before you can qualify.
That's quite the Catch-22, right? You need credit history to get a card, but you can't build credit history without a credit card or a loan. How do you crack this riddle? You may need a credit card designed for first-time cardholders.
- Student credit cards: These cards have low credit lines but may offer small cashback rewards on some purchases. When you turn 18 or enroll in college, you can expect to see these offers.
- Secured Credit Cards: Unless you're a college student, a secured credit card is probably your best bet. With this type of credit card, you have to make a security deposit to fund your credit line. The point is for your issuer to report your positive payment history to the credit bureaus, increasing your credit score.
- Unsecured, starter credit cards: You should expect high annual fees and possibly monthly fees if you get one of these cards. You'll also have a limited credit limit and a high-interest rate.
- Credit Card with a Co-Signer: If you know someone with excellent credit, he or she could co-sign on your application. Your co-signer would become responsible if you defaulted on the card.
- Gas station or store credit card: Some gas station chains and retailers, like Target, offer store credit cards that don't require an established credit history.
How to apply for a first credit card
Whether you've chosen a Discover, Capital One or secured credit card from Sky Blue, you can apply for your card online. If you've chosen a bank-issued Visa, you could apply in-person at a local branch if you prefer. Either way, you'll need to share your Social Security number, annual income and personal contact information.
The issuer will run your credit score. The resulting hard inquiry could hurt your credit score if you apply for several cards within a few months.
Check your own credit score
Before you apply for a credit card, check your credit score and make sure it meets the account's minimum requirement. When checking your own score, the resulting soft inquiry cannot hurt your credit. You can check your score:
- At AnnualCreditReport.com: This site, run by the three major credit bureaus, lets you download a copy of each of your credit reports once a week during the COVID-19 pandemic.
- With a free app: Credit Karma and Credit Sesame show you a free credit score — your VantageScore — without showing your actual credit reports. These apps provide free credit monitoring. You'll see lots of ads that you should ignore unless a card provides just what you need.
- With a paid service: TransUnion and Experian offer paid credit monitoring services and provide identity theft protection.
If your credit score meets the minimum requirements of the account, filling out and submitting the online application will be quick and easy. However, if your credit score needs some work, look for another credit card, choose a secured card (recommended option) or consider asking someone with excellent credit to co-sign with you.
Credit cards and building credit
The importance of a good credit score can’t be over-emphasized. Your credit score helps determine your eligibility for loans and sets your interest rates for these loans.
Landlords may also check your credit score when you apply for an apartment lease. In most states, car insurance companies can charge higher premiums if you have poor credit.
Your first credit card can set the tone for your credit history and your personal finances going forward, especially if you're a young adult or someone making a fresh start. So, make sure you know how credit cards work before submitting an application.
Tips for building credit with any card
No matter what type of first-time credit card you choose, your spending habits will determine whether your credit score climbs, stagnates or spirals in the wrong direction.
Paying your bill on time every month and keeping the balance paid down to 25% of your credit limit should grow your credit score. Try not to leave a balance at all, if possible, each month. This way you never pay finance charges, no matter your interest rate.
The key to paying off the entire balance is spending only what you can afford to pay off each month. This establishes good spending habits, and it protects your credit score.
Here are some ways to make this happen:
- Use the app: Issuers offer mobile apps that make managing your account a lot easier. You can connect your bank account to make payments anytime and set reminders about payments.
- Make automatic payments: With your card connected to your bank account, you can also set up automatic payments. At the very least, you should automatically schedule the minimum payment on your due date to avoid late fees or a reduction of your score. Then, you can make additional payments throughout the month to pay down your balance.
- Weigh spending habits: If you couldn't afford an item without your credit card, consider whether you need the item at all. Of course, emergencies come up, where you might have to use your card.
Always remember: Your credit card issuer will report your payment history to the three credit bureaus — TransUnion, Experian and Equifax — every month.
If you're just starting out in life, your first credit card may be the only data going onto your credit report. This means your card offers a great opportunity to build credit history.
Choosing the best credit card
Should you get a secured card or a starter credit card? How about co-signing or becoming an authorized user on someone else's card? The answers depend on your personal needs.
Student credit cards
Obviously, if you're a college student, a student credit card has some advantages over a secured credit card.
With a student card, you don't have to make a security deposit, and you can even find cash-back rewards offers, though they're typically not super impressive compared to the best rewards credit cards out there. Your spending limit will be low, but you have to start somewhere.
Secured credit cards
Unless you're a college student, a secured credit card is the recommended option, especially when you have bad or no credit.
With a secured card, you're the borrower and the lender. Your security deposit funds your credit line, taking away the risk to your lender. A secured card resembles a debit card, except the lender will report your payment history to the major credit bureaus.
Essentially, secured cards give you a chance to build credit history by making on-time monthly payments and keeping your balance low. The security deposit allows the credit card issuer to extend credit to applicants with no credit history or bad credit. So, just about anyone 18 or older can qualify.
Starter credit cards
These unsecured cards for people with no credit or bad credit have such low credit limits — often only $100 — and high-interest rates that they’re usually not worth your time.
The problem with such a low credit limit is that you risk always having 100% of your available credit in use. A 100% credit utilization rate is terrible for your FICO score, whether your credit limit is $100 or $10,000.
If you get a card like this, make sure you keep it paid off every month.
Becoming an authorized user on someone else's credit card is not a recommended credit-building strategy. Very few credit card issuers report credit data for authorized users because authorized users are not responsible for paying the bill. Only the primary cardholder gets credit for the responsible use of the card.
Finding a co-signer with excellent credit can help your own credit, but it could also ruin a friendship if you leave your co-signer with your huge credit card debt to deal with. Nobody plans to default on their new credit card, but it sometimes happens despite the best intentions.
Where to find the best credit cards
Credit card offers may come in the mail every week, especially if you have good credit or just enrolled in college. However, everyone else may have to look a little harder to find credit card offers.
If you fall into the latter category, start with your bank or credit union.
- Big banks like Chase and Bank of America have lots of Visa and Mastercard options for account holders. Plus, it's easy to connect these cards to your existing bank accounts.
- Local credit unions often have credit cards with competitive interest rates and low fees.
- Capital One is an excellent online bank for credit cards.
No matter where you find your credit card account, don't submit the application until you've read all the disclaimers and fees.
For example, find out about:
- Ongoing APRs: Many cards offer lower interest rates for the first year or on specific types of transactions like balance transfers, but after the first year, the APR increases. Always check your ongoing APR before signing up.
- Annual Fees: An annual fee isn't the worst thing, especially if your card offers nice rewards that more than pay for the fee. But you'll still want to know about annual fees before opening a credit card account. On some starter cards, the annual fee can take a huge chunk out of your spending limit before you even make your first purchase.
- Other Fees: You can expect foreign transaction fees and late payment fees, but look out for cash advance fees, balance transfer fees and paper statement fees. You don't want to be surprised by these extra charges, which will add to your credit limit and accrue interest just like any other charge.
In short: Compare fees, potential rewards, APRs and credit limits as you shop around for the best credit card for you.
How to improve your credit score
Don't feel bad if your credit score won't qualify you for your first credit card. A lot of people have been in your situation.
If you can’t get approval for a regular credit card, apply for a secured credit card, as they’re easier to get. After six months to a year, you'll likely qualify for a regular, unsecured credit card.
You should also consider credit builder loans, which a lot of banks and credit unions offer. The loan's proceeds will go into a savings account, and the bank will set up automatic payments from the savings account. This way, you'll never miss a payment, and you’ll pay the loan off as scheduled.
Regular payments: The key to building credit
Of all the financial data that comprises your FICO score, your payment history matters most. That's why credit builder loans and secured credit cards can be so helpful. They help you make continuing, regular payments.
When you're a young adult or making a fresh start financially, your credit report has very little data. A single late payment can pull down your score a lot.
The other big piece of the puzzle is your credit utilization rate. How much of your credit limits are you using? If you're using more than 30%, your credit use rate could be pulling down your score.
Most financial advisors and institutions recommend staying under 25% of your credit limits. And, if you do pay down an account all the way, consider keeping it open. A $0 balance helps lower your overall credit utilization ratio.
Getting your first credit card gives you a chance to make regular payments and keep your balance paid down, which comprises about two-thirds of your FICO score.
The remaining third of your score improves as the average age of your credit increases, you limit hard inquiries and you gain more diverse credit accounts.
Your first credit card: A chance to develop new habits
Good habits can take a lifetime to develop. But if you establish good credit card habits early, your entire financial life will offer more opportunities.
When you get a new credit card, use it only for emergencies at first. Don’t use the card for everyday purchases like fast food, groceries and gas. You could also save up some money for emergencies, if possible. Many personal finance experts suggest keeping enough money in a savings account to pay three months of living expenses.
When you have an emergency fund, a car repair, illness or another unexpected expense won't require you to use your credit card.
When your credit is strong enough to apply for a rewards credit card, you can then start making regular purchases with your credit card. You could put recurring expenses on your card, such as your cell phone, Netflix, utilities, or other monthly payments. Since you already pay these expenses every month, you know you can afford them with or without the credit card. Just be sure to pay them off at the end of the month.
Paying off your card every month: The best habit
Paying your credit card bill in full each month, and on time, will mean you won’t pay interest charges or late fees. Those two steps are the best things you can do to raise your credit score.
If you can’t pay your bill in full each month, at least make the minimum payment and don’t charge anything more until you’ve paid off the balance.
Avoid cash advances to keep balances and APRs low
From time to time, you may get blank checks from your credit card company. Don’t use them. They’re cash advances on your credit and carry higher interest rates than regular charges do.
After getting your first credit card, you’ll likely get more credit card offers in the mail from other credit issuers. They may offer all types of rewards and better rates than your current card.
Don’t go for them until you’ve established a good credit report for at least a year. Having too many credit cards can only complicate your finances and make it easier to overspend.
Review your credit card statements every month
Finally, read your statements carefully each month. Look for fraudulent charges and other errors and report them to your credit card company immediately.
Be sure to get in the habit of checking your free credit report at least once a year from the three main credit reporting agencies to check for errors on your report. Visit annualcreditreport.com to do this.
Following these habits can help you establish good credit and keep it for the rest of your life, providing cheaper financial products as you tackle other “firsts," like your first home, first new car or first small business loan.
Update: This article has been updated to reflect current practices of annualcreditreport.com.
Disclaimer: This story was originally published on May 10, 2022, on BetterCreditBlog.org. For more information on getting a credit card for the first time please visit: https://money.com/best-starter-credit-cards/