Credit is a fact of financial life, and one of the easiest ways to establish credit is with a credit card. If you’ve never had a credit card before, then finding the card with the right features can be a challenge. It seems that everyone is offering some kind of credit card deal, from big banks like Citi and Chase to your university alumni association. If you are applying for your first credit card, then you want to be sure that you find a card with the right credit terms for your needs, such as no fees, a low interest charge, and additional services such as ID theft protection, from a financial institution you can trust.
Understanding Credit Basics
When we talk about establishing credit, what you are doing is creating a personal financial profile that shows lenders that you are creditworthy (i.e., it is safe to lend you money or extend you credit). Lenders, retailers, and credit card companies use your credit rating as a gauge of confidence that you will be able to pay back any money you borrow, as well as interest.
Even if you have no intention of borrowing money, having good credit is important for a number of reasons. If you apply to rent an apartment, for example, any landlord will check your credit rating before allowing you to sign a lease. It has also become routine for employers to check your credit as part of a job candidate screening. If you plan to buy or lease a car, then you will need credit to qualify for the loan or lease. If you operate your own business, you will need good credit to borrow the money you may need to get started.
Most lenders assess your credit score to determine whether you are creditworthy. Your credit score is maintained by the three major credit bureaus—Equifax, Experian, and TransUnion. Your credit score is determined by various factors, such as how long you have had credit, your payment history, how much credit you have available, what types of credit you have, and how much credit you are currently using, etc. Scores can range up to 850, which is excellent credit, from 300, which is extremely poor credit. The average credit score for Americans is around 703, and for those younger than 30 who are just establishing credit, the average score is 662.
The credit cards you apply for and use can have a big impact on your credit rating. Qualifying for your first credit card is an excellent way for you to start establishing credit and take charge of your personal finances.
Credit Card Terms You Need to Know
Before you start shopping for a credit card, there are going to be some common credit card terms that you need to understand so that you can make the right choice:
- Annual fee: Does the card charge an annual fee? Many credit cards that offer benefits typically charge you around $100 per year, while many other types of cards charge no fee.
- Annual percentage rate (APR): This is important to consider because the higher the APR, the more you are charged for your outstanding credit card balance. Generally, you want to choose a card with a low, competitive APR.
- Cash back: Some cards give you cash credits when you meet certain conditions, such as spending a minimum amount or using the card for dining out or travel expenses.
- Credit limit: This is the maximum amount you can spend using your credit card.
- Interest rate: This is the APR charged on the outstanding credit card balance and is usually offered as a fixed rate or a variable rate that can change annually or monthly, depending on current market rates.
- Minimum payment: This is the lowest amount you have to pay on your monthly credit card bill so as not to incur a penalty. The minimum payment is structured to keep your account current, but it will not help you pay down your credit card balance because interest charges will continue to add to your account balance.
- Principal: This is the total credit card balance, (i.e., what you owe, before the interest fees are added).
- Secured card: A secured card has a credit limit that is set by the amount of money you place on deposit to use the card. Rather than being a credit card, a secured card is more like a debit card because you are borrowing against your own money.
What to Look for in a Credit Card
Armed with an understanding of these basic credit card terms, you can start looking for a credit card that best suits your needs. Here are some tips to consider:
- Choose a card that suits your lifestyle. Choosing the right credit card depends on how you plan to use it. For example, if you plan to keep your credit card only for emergencies, then you want a card without fees and a credit limit that is large enough to handle anticipated financial problems. If you plan to use your credit card for shopping, you might look for a card that offers reward points you can use toward purchases. If you plan to use the card for travel, then you might benefit from a card that gives you travel points and offers travel benefits such as airline upgrades, free travel insurance, and no foreign transaction fees. If you aren’t sure what best suits your needs, cards that offer cash back are always a good choice.
- Shop for the lowest APR. It’s always best to look for the lowest APR, but if you plan to pay off your credit card each month, then you can consider a higher APR if you get other benefits. Also be sure to understand whether the APR is fixed or variable based on the market rate.
- Understand what to expect for a credit limit. If this is your first credit card, then you will likely have a lower credit limit—perhaps only a few hundred dollars—but as you establish credit and maintain your payments, you usually can increase your credit limit.
- Watch for introductory offers. Be sure you understand the terms of introductory offers. For example, offering an introductory APR of 0% is a common introductory offer, but be sure to check what the APR becomes after the introductory period.
- Check the fees and penalties. One way credit card companies make money is by charging added fees for services such as balance transfers. There are also sure to be penalty charges for late or missed payments. Be sure you understand all the fees and penalties before you sign up for a new card.
- Ask about customer service. You will want to be able to use your credit card often, which means that if you have a problem, you want it resolved quickly. Check for automated customer service programs such as alerts for potential fraud or ID theft and be sure that you have access to online and phone support when you need it.
An important consideration is the organization that stands behind the card. You want to apply for a card from an organization you can trust. iQ Credit Union, for example, gives its members the best terms possible, as well as added benefits such as security against ID theft. The iQ Visa Platinum Credit Card has no fees, unlimited 1% cash back, and 24/7 fraud detection. It also offers travel accident insurance, travel emergency coverage, and other benefits.