In part one, we talked about the preparation needed before choosing your first credit card (read it here). Knowing your financial habits and background is necessary before entering into the world of credit. Credit can be a useful tool if utilized carefully. It can be your worst nightmare if used recklessly.
Once assured that your financial habits can handle the addition of "loans on a plastic card," it is time to start picking out the right card for you.
- 1. Research various cards. Not all credit cards are the same, and not all cards are credit cards.
- There are two kinds of cards- a charge card and a credit card. Each one gets swiped, and you go home with your goods or services with the promise to pay later. A charge card's balance must be paid in full every month. So there is never any interest charged. However, if you pay late or fail to pay in full, there are hefty fees. These cards usually also carry a pretty high annual "membership" fee. This is where the bank makes it money. A credit card usually has a minimum monthly payment, an interest rate charged on the unpaid balance monthly, as well as other fees. They may also have rewards.
- Look for a card with good benefits. These include but are not limited to:
- Low-interest rate
- No annual fee
- No monthly maintenance fees
- No application fees
- Some rewards
- Speaking of rewards, credit cards with rewards often have a higher interest rate or an annual fee. Do a little math here. How often and how much to you plan on using your credit card? Will the rewards exceed the annual fees or interest you might pay? If not- it is no reward.
- When looking at rewards cards, seriously consider cashback cards rather than other rewards like airline miles. Especially with the miles, there are so many restrictions on their use and blackout dates. It is better to save your cash and buy what you want when you want to go!
- Read ALL the fine print. There are a lot of terms and conditions to everything these days and we have become conditioned just to click agree knowing that we would not be able to use the site, app, etc. without it. Some cards will dramatically raise your interest rate after only one late payment (and by late we mean minutes!). Some make you give up your right to sue and force arbitration by people of their choosing when trying to settle disputes. Some charge for credit limit increases. Know everything about the card before accepting the account. You can check out the fine print on most cards websites even before applying. The Credit Card Act of 2009 instilled new protections for consumers. You can read more about them here.
- 3. Consider a secured card first. A secured card is similar to a car or home loan in that it is backed up by something worth its limit that can be used to pay off the debt in case of default. For a car loan, the vehicle gets repossessed and sold to pay off the loan. A secured credit card is backed up by depositing money into a savings account held by the bank generally in the amount of your credit limit. This account is a backup; it is not meant to replace your regular monthly payments. Everything about a secured card works like a regular credit card, and it is reported to the credit bureaus as such.
A secured card is a great entrance into credit card use. Try going through your bank or credit union where you have an already established account. After building a good track record of use and payments, the financial institution who issued your card may convert yours to a regular, unsecured card and release your savings deposit.
- 4. Only have one all purpose card. It is very tempting to get a card from all the stores we shop at to get special deals and money off that first purchase with instant credit. It is also tempting to spend a little on this card and a little on that card and lose track of how much you have spent. Avoid that temptation. Get a card that is all purpose or accepted most everywhere. Major card brands like Visa, Mastercard, and Discover is accepted almost anywhere, even in other countries while traveling. Having only one card makes it easier to keep track of your debt spending, and if lost or stolen, much easier to report and recover.
Credit cards are great tools to have. They are an excellent way to build a good credit history, access funds to cover an emergency, and possibly reap rewards for future use. They can also be a liability if used incorrectly, such as a source of income rather than as a loan. Take care of them and they will take care of you.
Watch for the last part of this series, Care and Feeding of Your First Credit Card.