Thinking about applying for your first-ever credit card? Here's a list of what you should understand before you send in even one application.
Know why you’re going to use credit—and how
Once you have that piece of plastic in your wallet, it’s amazingly easy to whip it out and use it to buy something that you don’t really need. If you don’t want to end up thousands of dollars in debt (see #2 below), plan ahead for how you’re going to use that credit card and stick to it.
Ask yourself—why do I want this card? Is it for emergencies only? Only for big purchases? Will I use it for meals, for entertainment, for school expenses? How will I pay it off each month?
Develop strategies to help you stick to your credit spending plan. If you want your credit card only for emergencies, don’t take it with you when you’re hitting the big sale at the mall. If you’re planning on using it on a more regular basis (if you have a rewards credit card, for example), track your spending so that you know you can pay it off each month.
Understand the financial danger of carrying a balance each month
It’s tempting to use a credit card to purchase something that you want to have but can’t really afford. You can tell yourself that you’ll pay off the card completely over the next several months, but will you really have the discipline to do so? Many first time credit card users make the mistake of disregarding how much it will cost to pay only the minimum balance on their cards each month.
Suppose you spend $1,000 on a brand new laptop. Your credit card carries an 18 percent rate, and your monthly minimum payment is $25. If you make only the minimum payment it will take you almost nine and a half years—113 months—to pay it off! Your laptop will be obsolete many years before that.
Know the language of credit cards
As you’re shopping for the best credit card deal, you’ll be coming across terms like annual percentage rates, average daily balance, fixed rate (fixed APR), grace period, prime rate, etc. What you don’t understand can hurt you! Take some time to familiarize yourself with these terms so that you can do a valid comparison of various credit card offers.
You can find a helpful glossary of common credit card terms right here on our website. Take advantage of it.
Know your options and consider the pros and cons of each
If you look on our site, you’ll find an almost bewildering number of credit card offers. How do you know what’s right for you?
As you’re shopping around, you’ll want to compare credit cards based on factors like their annual percentage rate and annual fees (if any). But you may also be interested in earning airline points if you want to travel or you may want to get a credit card that benefits a particular organization that’s important to you.
That’s fine—as long as you understand that if you carry a balance you may have to pay a higher interest rate to get those airline miles and/or support that group.
Understand how your use of this credit card can affect your future
The way that you use your credit card will be reflected in your credit report and in your credit score. Use your card responsibly, pay off the balance (or at least make the minimum payment) on time each month and over time you’ll be building a good credit score.
A good credit report can make a huge difference in every aspect of your life, from the rate of interest you’ll pay if you ever want to own a home or buy a car to the type of jobs that you can get.
Bottom line—the most important thing to know before you get a credit card is that you can handle it responsibly.