Shopping For A First Credit Card
Long before we are old enough to carry credit cards ourselves, advertisers make sure we know about the power of plastic: “It’s everywhere you want to be.” “It pays to Discover.” “What’s in your wallet?”
While using an ad campaign to choose a card is trump trb system a terrible idea, the slogans have one thing right: A credit card can be a powerful thing. For teens and 20-somethings looking to pick a first card, taking the time to choose carefully can save money and offer a boost in establishing and building a credit history.
An excellent credit score will be helpful when you start to think about buying a car or getting a mortgage. Even if you do not plan to take out a large loan in the near future, your credit information can be a factor in renting an apartment, obtaining a membership at a club or getting hired for certain jobs.
Lenders use credit reports to determine how risky it is to give a borrower – that is, you – a loan. All in all, the lender just wants to know if the borrower will be able to pay back the loan. If the borrower has bad credit, then he or she probably made some major or ongoing financial mistakes and is more likely not to repay. On the other hand, if the borrower has good credit, then he or she has a history of paying back debt, and the lender will most likely grant the loan.
Credit cards are effectively short-term loans that need to be paid back within a short grace period. Getting the first credit card can be tricky. Credit card companies do not have any basis for your credit history since you have not borrowed any money in the past. So how are you supposed to establish and build your credit rating without a history?
One way is to apply for a secured credit card. Secured credit cards are backed by a deposit that you make upfront. Usually, the amount you deposit will be the same as the card’s credit limit. Everything else is like a regular unsecured credit card: You use the card to buy things; you make monthly payments; and you incur interest if you fail to pay off the full balance. A secured credit card should be only a temporary step to building credit. Try to pay off the total balance every month to show that you are financially responsible. After all, not only do you want to build a credit history, you want to build a good one.
Another effective way to start your credit history is to become an authorized user on someone else’s card. Many parents will designate their children as authorized users on their credit cards so that the children can build credit without the legal obligation to pay the balance every month. However, if the person whose account you are authorized to use does not handle the account properly, their mistakes could end up hurting rather than helping your credit.
Once you establish your credit history, you can shop for your first unsecured credit card. You will quickly discover that there are many to choose from. A number of factors can help narrow the search.
The most important of these is how you intend to use the card. Are you going to use it only for emergencies? If not, will you pay in full each month, or will you carry a balance on the card? Once you decide how you will use the card, follow your self-imposed rules. It is very easy, and dangerous, to continually swipe the card and tell yourself it is for a good reason. But it is crucial to be stubborn about establishing good spending habits, even – or maybe especially – early in life.