Setting up your first credit card is a major money milestone: When you get one, you join the more than three out of four Americans with plastic in their pocket. A credit card can allow you to buy goods and services pretty much whenever, wherever you like. You’re starting on an important credit-building journey as well.
As you comparison-shop and fill out an application or two, it’s valuable to understand the ins and outs of setting up a credit card. This can help you select the right card for your needs and use it responsibly. So read on to learn the full story on:
• The basics on credit cards
• What you need to get one
• How to apply
• The smart way to purchase with plastic once you’ve been approved.
What is a Credit Card?
A credit card is a physical card (typically a plastic one, rectangular in shape) that allows you to use your credit card account. By physically presenting the card to a vendor or keying in its details online, you can use your credit card to make purchases, donate funds, and withdraw cash up to your credit card limits. Some details:
• The average credit limit in the U.S. now is almost $30,000, but the amount you’ll be given will vary based on such factors as payment and account histories, how much debt you are carrying, and your income.
• A higher credit limit isn’t necessarily better (you’ll learn more about why below) as it can allow you to rack up more debt than might be financially healthy for you. Also, note that if you are new to credit, your limit may start low and rise as you show you can responsibly pay it back on time.
• A credit card is a revolving form of a short-term loan. You then make payments to the credit card issuer. There are various types of credit cards (including all kinds of points to be earned and other rewards) to consider.
• Depending on your particular situation and what kind of purchase you are trying to fund, there’s also the personal loan vs. credit card difference to ponder.
As you mull over your options, let’s be clear: Credit cards aren’t giving you this purchase power for free.
• You may pay an annual fee and other credit card fees, and you are charged a typically high rate of interest on the balance you carry on your card.
• The latest figures say that offers of new credit card accounts have an average interest rate of more than 20% at the start of 2024. In addition, if you miss a payment’s due date, you will probably be assessed late fees as well.
• The latest Fed intel shows that Americans carry more than $1 trillion in credit card debt. That means a lot of people may have considerable debt. Paying careful attention to keeping your credit card account and your personal debt in good shape is an important responsibility.
Why You Might Need a Credit Card
Let’s look on the bright side of why so many of us have and reply upon credit cards.
• They definitely make our lives easier. If you’d like to make purchases or pay bills online, then a credit card can be ideal.
• It’s a convenient way to make in-person transactions without needing to carry around cash.
• If cash is lost or stolen, it may be gone forever. With a credit card, though, you can report yours as lost or stolen and the issuer can cancel your old account and provide you with a new number and card.
• When you’re short of cash, a credit card can help you to make necessary purchases. Say your washer/dryer breaks and you’d need about six months to save up for a new one. A credit card lets you get the appliance right now (and clean your laundry) while paying over time. Or maybe you get hit with a major car repair or dental bill. A credit card gives you the power to pay upfront and then gradually whittle that balance down.
• Another reason you probably need a credit card: Many lodging facilities and car rental companies, as just two examples, may ask for a credit card number to hold your reservation.
Basic Requirements to Get a Credit Card
Credit card issuers may differ somewhat in the specifics of their requirements to get a card. In general, though, the financial institutions look for good credit scores and the financial ability to make credit card payments. Here are some pointers as you get set to apply:
• Before you apply for a credit card, you can get copies of your credit reports from the three major credit bureaus for free at AnnualCreditReport.com. If there are any errors, dispute the data, and provide correct information, sending it to each of the credit bureaus that list incorrect details. The better your credit reports look, the higher your scores should be. This makes you a better candidate for loans and lines of credit.
• A credit card issuer will also use financial criteria to help ensure that you’re able to make the payments. This can include your income and employment stability. In fact, the CARD Act of 2009 requires credit card issuers to consider a consumer’s ability to make required payments — at least the monthly minimum based on the outstanding balance.
• Other requirements include being at least age 18 and having a Social Security number.
Recommended: How Many Credit Cards Should I Have?
How to Apply For a Credit Card
Next up: how to open a credit card. It basically requires filling out an application and then submitting the application for approval.
You can apply for your credit card in multiple ways:
• in person at a financial institution
• by mail
• by phone
• online.
After checking your credit scores, you may want to compare offers (including interest rates and APRs). As we’ve noted, interest rates can be high, so do research; there are plenty of online tools and sites that allow you to scan various offers.
Some cards may be no-interest credit cards during a promotional period. Benefits can be obvious (not paying interest) but also check the length of the promotional period, what happens when it ends, and what fees may be involved.
Then apply for the card of choice that you believe you can qualify to receive. Many people opt to apply for a credit card online. You fill in basic information about yourself, and agree to a “hard inquiry” credit check (which may briefly lower your score when it shows up that you are applying for credit). Typically, there is no application fee involved to seek out a credit card.
How to Use a Credit Card Once You Have It
Once you’re approved and receive your card, it’s important to use a credit card responsibly. Strategies for doing that include the following:
• Don’t make too many impulse buys. ”Too many,” of course, will depend upon your budget and how much your impulse purchases cost. But the truth is, when you are not pulling out cash to pay for an item, it may feel almost like it didn’t happen. Using a debit card in some situations can counteract this.
• Use the appropriate credit card. If you have more than one card, consider which one is best to use; for example, will you earn rewards on a certain card?
• Take advantage of perks. If your card comes with a reward or cash-back program, take advantage of the benefits.
• Sign up for automatic payments or for payment due-date reminders. That way, you can make payments on time, which helps with credit scores. If you fall behind, this can lower your credit scores and make it more challenging to get good interest rates going forward.
• Check your monthly statements for errors. This is how you can catch identity theft and other credit card fraud. Let the issuer know ASAP when you spot something that’s not right — and report a lost or stolen card as soon as possible.
After you make purchases on your card, you’ll receive monthly statements, typically with a minimum payment (perhaps 1% to 4% of the balance or a fixed amount) and the outstanding balance. Credit card companies usually give you a grace period in which you can pay off the balance in full to avoid owing interest.
Consider these two caveats:
• A common mistake new credit card holders make is thinking that the minimum payment due is the “right” amount to pay and somehow improves their credit. Wrong! The minimum payment is just what it says: the minimum to avoid certain fees. It is actually preferable to keep your balance low or non-existent (meaning pay the entire amount owed each month). What’s best for your credit score and financial health is often using only 10% or less of the credit limit on your card.
• If your credit card allows you to take cash advances, know that interest rates are often higher than what you’d pay on purchases, plus there may be cash advance fees. If you take the money from an ATM or a bank, there will likely be additional fees. Also, it’s standard that interest accrues from the date of withdrawal with no grace period. In other words, this can be a very costly way to get your hands on some cash.
Recommended: Understanding Purchase Interest Charges on Credit Cards
The Takeaway
Getting a credit card is a major rite of passage as well as a big responsibility. As you’ve learned, it can be simple to apply and get approved for a card, but staying on top of your debt can take some attention and effort. Given how many Americans have at times unwieldy credit card debt and how high the rates are, use credit carefully, and you’ll enjoy its convenience and credit-building powers for years to come.
Whether you’re looking to build credit, apply for a new credit card, or save money with the cards you have, it’s important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.
FAQ
What are the benefits of having a credit card?
You can use credit cards to make purchases in person and online, and then make payments over time (although interest will accrue if you don’t pay the balance in full each month). Also, many offer rewards, among other benefits.
What are the requirements for opening up a credit card?
Requirements vary, but typically issuers want to see a good credit score and the financial ability to make payments on the card. Additional requirements:The applicant must be 18 years old with a valid Social Security number.
How should you use your credit card?
There are a wide range of ways to responsibly use your credit card. In fact, one of its key benefits is its flexibility. So, as long as you follow the credit card rules and manage the balance responsibility, how you use it is really up to you.
Photo credit: iStock/Alesmunt
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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