5 Things You Should Know Before Opening Your First Credit Card

Opening First Credit Card

While having a credit card or two is a normal part of life and smart personal finances, opening your first card may seem daunting. For example, how do you choose which card you want? How do you know which fees you should or should not pay? or how having a credit card can affect your credit score? Having and responsibly using a credit card is easy, but knowing these things before you open your first credit card will make the task seem a lot more manageable.

1. What actually is a credit card

A credit card is almost the exact same thing as a debit card, except instead of the money being taken directly and immediately from your checking account you typically have a 30 day grace period to pay it off. During this time you do not accrue any interest or fees. In other words, a charge to a credit card can be thought of as a short term loan.

2. The best card for you

There are endless credit card options. Some cards are harder to get than others and some require you you to already have a certain credit score. Some have travel rewards or miles while others may give you cash back. There are cards designed for students as well as ones for specific stores and brands. Finding the card that works best for you is essential, so it is important to do your research before applying for your first card. A really helpful website for this is Nerd Wallet’s credit card tool which will help you sort though all of the credit card’s out there and provide you with options based on your needs.

3. How having a credit card affects your credit score

Credit cards are one of the main things that affect your credit score, so knowing how they affect it are important. Credit Cards affect your credit score in multiple ways including: payment history, credit utilization, length of credit history, new credit, and types of accounts in use.

The first two ways, payment history and credit utilization are the most important. Payment history simply refers to when you make your payments. If you always pay on time your credit score will be positively impacted, whereas paying late or not paying the amount in full on time could hurt your score. Credit utilization is the percentage of your credit line you are using during each month. The ideal percentage to stick at is 30%. In others words, if you have an approved credit line of $300 a month then you should only be charging $100 dollars a month to the card.

The other three ways, length of credit history, new credit, and types of accounts in use will not affect your score as much, but are still important. Length of credit history simply refers to how long you have had your card(s). The longer you have had your credit card the better it is for your credit score. However, this is not something you can control when first opening your credit card. New credit is similar to length of credit history. When you first apply for a credit card your score takes a small hit, but this cannot be controlled and will not greatly affect your score. Just make sure you are not applying for multiple cards in a short period of time. The last factor, types of accounts in use refers to the the kind of credit accounts you have. The more diverse the accounts (i.e a credit card, student loan, and mortgage) the better, but if you are just looking to open your first credit card do not worry too much about this.

4. Credit card fees

Certain credit cards have certain fees and it is important you know what they are before opening a credit card.

Annual Fee: Many cards have an annual fee. This is a certain amount you pay each year to have the card. There are often annual fees on cards with more rewards. However, this is easily avoidable as many cards do not have annul fees.

Foreign Transaction Fee: This is a charge you get whenever you use your card in foreign countries and is typically between 3% and 4% of your purchase. If you plan to use your card a lot overseas make sure you open up a card with no foreign transaction fees.

Late Payment Fee: A charge you will receive if you do not make your minimum payment on time. This fee is typically between $30 and $40 and can easily be avoided by making your payments on time.

5. Minimum payments and interest

A minimum payment is the smallest amount of money you can pay each month without damaging your payment history (and credit score) or incurring a fee. A minimum payment is typically calculated as certain percentage of your balance or a certain percentage of your balance plus fees and interest. However, even though you might be able to get away with only paying a small amount each month the money you do not pay will accrue interest and thus you will only be paying more in the long run.

The best thing to do is always pay your credit card balance in full so you do not have to pay fees or interest. 

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