For whatever reason, you’ve come to a point in your life when it’s time to get your first credit card.
Maybe you’ve just graduated college, or you’ve just turned 18 and want to get ahead of the credit-building game.
Without a doubt, this is an exciting moment on your path to become financially independent—but it comes with some uncertainty and unknowns.
How do you even get your first credit card? And what do you do once you have it?
Let’s walk through the trajectory of getting your first credit card, and what to do to set yourself up for success down the line—so graduating to better, lower-rate credit cards and more diverse products is a possibility in the future.
How to Search for and Score Your First Credit Card
If you’re on the hunt for your first credit card, odds are you’re eager to get a card as soon as possible.
But as you forge ahead on your path to control your own financial destiny, you’ll need to pump the brakes when you’re searching for your first credit card.
This is a process to consider carefully and go about deliberately.
There are a number of things you’ll need to consider while you search for your first credit card.
Make Sure You’re Ready for a Credit Card
Before you overlook this one as an obvious first step, think carefully about whether you’re ready to take on a credit card.
Having your first credit card in your name requires some financial responsibility. You need to be prepared to pay off what you spend on a credit card each month without being reminded to do so—otherwise, you’ll incur interest payments, late fees, and take hits to your credit score.
And along those lines, do you fully understand how your credit card and credit score relate? How you use your first credit card will have implications on your credit score—especially if you (likely) don’t have much credit history to your name.
Just because you’re old enough for a first credit card doesn’t mean you’re actually ready and fully equipped to use one. Take some time to get a solid understanding of the credit card basics and get a picture of where your financials stand before you dive in.
Doing so will save you from some early on mistakes that can be disasters for your credit. We’ll get to more on those disasters (and how to avoid them) later.
Understand What It’s Like to Apply for Your First Credit Card
Next step is to fully prepare yourself for the realities of securing your first credit card in today’s market.
In the old days, major credit card issuers would set up shop on college campuses, offering freebies to college students if they signed up for a student credit card.
If you were in the market for easy credit, this was great. But such easy credit got many students and young people quickly into debt.
After some financial reform, practices like these are prohibited—meaning that you’re protected from taking on debt before you’re ready, but it’s also harder to secure a credit card as a young person.
If you’re under 21, you can technically get a credit card. Issuers will usually require that you have a full-time job, though, making it tough for students to qualify. Or, if you’re under 21, you could have an adult co-sign for your credit card application.
For credit card applicants over 21, it’s still tough to get a first credit card—but a little easier now that you’ve crossed the threshold. You need to demonstrate that you have steady income, assuring credit card issuers that you’ll be able to pay back what you owe.
But when it comes down to it, know that if you’re applying for your first credit card and you don’t have much credit history at all, you’re not going to qualify for every credit card you find online.
Know What Options are Available to You for Your First Credit Card
Now that you’re aware that qualifying for your first credit card can be tough, what credit card options are realistically available to you?
Well, here are five places to check in with first.
- Your bank
If you’ve been responsible for a checking or savings account with a certain bank from some time now, your best bet might be to go to your bank for your first credit card.
With an existing relationship in place with your bank, you might have a better chance at getting your application approved—especially if you’ve managed your account responsibly. If you don’t have any overdrafts on your account, it could make the bank comfortable extending you a credit card.
- Secured credit cards
Another great option for your first credit card is a secured credit card.
Most credit cards come unsecured. If you take out an unsecured credit card, you won’t need to put down any form of collateral or back your card with a savings account in order to use the credit.
This is inherently a riskier deal for credit card issuers—there’s nothing they can seize or liquidate in the case that you don’t pay your credit card debt. And because it’s riskier to give out unsecured credit cards, they’re harder to qualify for.
That’s where secured credit cards come in. A secured credit card is “secured” by a deposit you make against the credit limit of the credit card. The bank that issues you the secured credit card holds that deposit just in case you don’t make your credit card payments down the line.
Because the bank has some reassurance that they’ll be able to get their money back if you don’t pay your credit card bills, you might have an easier time qualifying for a secured credit card if you lack credit history or have a poor credit score.
Secured credit cards are a great stepping stone and first credit card. You’ll build your credit history while using the card responsibly, and can graduate to better credit card products in the future.
- Store and retail cards
Another good option for a first credit card if you lack significant credit history is a credit card from a retail or department store where you frequently shop.
These cards are typically easier to qualify for. But on the downside, they come with higher interest rates—so you definitely do not want to carry a balance on these month after month.
The other issue with store credit cards is that they can only be used at the specific store—so you won’t have many purchasing options with the card. But if you shop at the store frequently, a store card can be a great starter card to prove your reliability and build your credit history.
If you’re having a tough time getting approved for your first credit card, another option is to get a co-signer on the card.
If you can get a parent or trusted adult to co-sign the card for you, that person’s income and credit history will be used to determine your eligibility for the card.
But when you have a co-signer on the card, that person’s credit history is fully at stake for your behavior with the card. It’s essential that you work with only a trusted co-signer, and use this first credit card very responsibly.
- Possible credit cards with no credit history
You can find credit cards even if you have no credit history or “limited credit history.”
It’ll take some work to find them, but almost all the major credit issuers offer “limited history” credit cards. Check Capital One or American Express to see what they offer for people with limited credit history.
These credit card issuers do approve borrowers with limited credit history, but be aware that these credit cards might come with a higher interest rate.
Best Practices for Your First Credit Card
So, you’ve got your first credit card in your pocket.
You’ve made it over the first hurdle of owning your credit history.
Now that you have a first credit card to your name, what’s next?
What should be on your radar as you use the card? And what can you do with your first card to make sure you’re setting up for credit card success in the future?
Here’s what to keep in mind as you use your first credit card.
Pay on Time
When you look at what goes into the FICO algorithm—the equation that spits out that three-digit, all-important credit score of yours—you’ll understand why paying your credit card bills on time matters.
Think of it this way: 35% of your credit score is determined by your payments history—a.k.a. your recurring habits for paying off debt. By looking into your payment history in the past, lenders you might work with in the future can tell if you’ve been trustworthy with your finances.
So, when you have your first credit card, it’s crucial that you pay your credit card bills on time, each month. Because interest accrues on the balance you roll over each month on a credit card, late payments will lead to interest charges and late fees.
Paying your credit card bill late is essentially a lose-lose situation: You’ll lose money from additional payments on what you borrow, and you’ll lose credibility in the eyes of future lenders when your credit score gets dinged for it.
If remembering to pay your credit card balance turns out to be a problem for you, most credit card issuers and banks let you set up balance alerts each month through their mobile apps.
Pay in Full
Another important best-practice to keep in mind with your first credit card is paying in full.
When you get your credit card statement each month, you’ll see a “minimum payment due” on the bill. This shows the portion of your balance that you need to pay off your credit card in order to avoid late fees.
But even if you just make your minimum payment due, you’ll still accrue interest on the balance you roll over (and don’t pay off) each month. To avoid accumulating debt, pay your balance in full every month. You’ll save lots in interest charges in the long run, and won’t find yourself in a big hole of debt that you can’t pay off down the line.
Keep an Eye on your Credit Utilization Ratio
Another big factor that goes into your credit score calculation is “amounts owed.”
Amounts owed takes up 30% of your credit score, and it reflects the amount of debt you currently owe across all your credit accounts.
And importantly, your amounts owed relative to your total credit limit represents your credit utilization ratio.
A high credit utilization ratio (indicating you owe a lot across all your credit accounts) usually correlates with high risk borrowers—if you have lots of debt across your accounts, there’s a good chance you won’t be able to pay back everything you owe.
So when it comes to best practices on your first credit card, be aware of how much you’re putting on your card relative to the credit limit you were approved. In general, a good rule of thumb is to keep your credit utilization ratio below 30%. (Meaning if you have a $10,000 credit limit, try not to have a balance of more than $3,000 on your credit card at one time.)
To keep your amounts owed low, make sure you’re not putting too much on your card, and pay your balance off every month.
Know Your Credit Score and Check Your Credit Report
If you just took out your first credit card and want to make sure you’re setting yourself up for success down the road, it’s important to always be in the know when it comes to your credit report.
By now you know how closely lenders look at your credit score and credit history. It’s a big part of your financial identity—so you need to keep a close eye on where your credit rating stands.
Three major credit bureaus keep track of your personal credit history: Equifax, Experian, and TransUnion. You’re entitled to a free report from each of these bureaus each year. You can get a report at annualcreditreport.com.
Checking your credit report at least once a year will help you know how you’re doing and help you monitor your report for any errors that pop up. (1 out of 5 credit reports have errors in them, so it’s worth checking to see if you’re being dinged for activities you didn’t do.)
If you do find an error on your credit report, you can dispute it with any of the credit reporting bureaus. Make sure it is definitely an error, and begin putting together documentation that helps you prove your case. This could be proof of payment or a correspondence related to the charge in question.
Once you’ve gathered the documentation that proves the error, write a letter to the credit bureau that reported the error. Check out the Federal Trade Commission’s dispute letter template for help crafting your letter.
Graduating to New Credit Card Products
After you take out your first credit card, make sure you’re following those best practices to get your credit history off on the right foot.
Your initial habits with your first credit cards will play a large part in what you qualify for down the line.
If you want to graduate to bigger and better things—namely lower-rate credit cards, more rewarding credit cards, different types of credit cards (like business credit cards)—you’ll be happy you handled your first credit card go-around responsibly.
And when it comes time to graduate to new credit card products, here are some things to keep in mind.
Applying for New Credit Cards
Once you’ve built up your credit history with a first credit card—and proved that you’re a responsible borrower—you’ll have more credit card options available to you.
In theory, practicing good borrowing behavior has increased your credit score, and you’ll be able to qualify for better credit cards. With some proof that you’ll pay back what you owe, you can qualify for lower-rate and generally more rewarding credit cards.
Once you see an increase in your credit score after using your first credit card responsibly, it’s important to not go out on a credit card application frenzy.
Yes, building up a mix of credit with different credit cards is a good thing, and having more credit limits adding to your overall available credit will help you win the credit utilization game.
But every time you apply for a new credit card, the credit card issuer will pull your credit score from at least one credit bureau—sometimes all of them. And every time your credit is pulled, you’ll see a slight dip in your credit score.
This ding in your credit score won’t last forever—and isn’t a big deal if you just apply for one card. But if you go around applying for multiple credit cards at once, those dips in your credit score will add up.
So, as you graduate to new credit card products in the trajectory of your financial life, just make sure that you aren’t applying for new credit cards very often or all at once.
Increasing Your Credit Limit on Your First Credit Card
Another step forward along your credit card journey is simply increasing your credit limit on your first credit card or other credit cards you have.
Increasing your credit limit will help you lower your credit utilization ratio or give you more flexibility to make bigger purchases.
Asking your credit card issuer for a credit limit increase is a good idea in the following scenarios:
- Your credit score is good. If you’ve practiced solid borrowing behaviors with your first credit card and your credit score is looking good because of it, you might be able to ask your card issuer for a credit limit increase. (If you show that you’re responsible with your money, your card issuer will be willing to extend more credit to you.)
- You’ve got a good track record with your credit card company. If, in the early days, you’ve practiced those good borrowing habits we outlined above—paying on time and in full—you’ll be in better standing to ask for a bump in your credit card limit. You’ll usually be able to show that you’re in good standing and that you deserve a credit limit increase once you’ve been with your creditor for at least six months.
Once you’ve got a solid amount of credit history under your belt—and your credit score shows that—you could absolutely qualify for a credit limit increase.
If you do choose to improve your credit card products this way, make sure you’re only asking for a credit limit increase on one credit card account. Increasing your credit limit will likely require another pull on your credit card, so it’s the same deal as above—a bunch of credit score inquiries in a short period of time will hurt your score.
Moving Onto Business Credit Cards
Now that you’re long past your first credit card—and have multiple experiences with personal credit cards under your belt—you’ve opened up a lot of doors by using your credit cards responsibly.
No matter who you are and what your future looks like, you’ll be happy that you’ve set yourself up for financial success by using credit cards responsibly and building a solid credit score. Now, when you need to take on a mortgage for your first house, take out a personal loan down the line, or open more credit accounts in the future, you’ll be able to do so.
And in the exciting case that entrepreneurship is your calling, your responsible borrowing behavior with your first credit cards in the past will set you up nicely for financing your business in the future.
And if, down the line, a business credit card is the next addition to your wallet, here’s what you need to know.
Why You’d Want a Business Credit Card
While you don’t technically have to own a business to apply for a business credit card, in most scenarios, you’d want a business credit card for your business.
Whether you’ve just started up or have some solid business ownership experience, a business credit card can come in handy. It gives you access to a revolving line of credit that you can use for your business purchases or for cash withdrawals—with no hassle whatsoever. It can be a cushion on your cash flow if you’re having cash flow issues from month to month.
Plus, when you own a business, it’s important to separate your personal finances from your business finances. So, instead of putting all your business purchases on your personal credit cards, put them on a business credit card instead. This will also help you track your expenses and save you some of the headache that comes with bookkeeping for your business.
Your business credit card will also help you establish and build up your business credit. Before you had a business credit card or a business loan, your personal credit score was the only thing on your radar. That was built up by your good habits with your first credit cards, student loans, auto loans, or mortgages.
Now, as a business owner, you need business credit history to secure financing for your business or contracts with different vendors you work with down the line.
And finally, a business credit card lets you earn all those rewards and perks that you know and love from your personal credit card—just for your business. There are business credit cards for travel rewards, business credit cards for cash back, business credit cards for bonus points, and so on.
How a Business Credit Card is Different than a Personal Credit Card
Now, if you’ve used personal credit cards all your life and you’re graduating to business credit cards as an entrepreneur, there are a few differences you need to be aware of:
- Business credit card rewards are geared towards businesses. It may seem obvious, but it’s worth noting—business credit cards come with rewards that make sense for businesses. You might earn rewards when you spend at office supply stores, purchase computer software or hardware in bulk, or pay for advertising in the United States.
- Small business credit cards might not have the same consumer protections. While your personal credit cards and their issuers were held under consumer protection laws—specifically the Credit Card Act of 2009—business credit cards don’t have the same level of protection.This means that your business credit card’s APR or fees could be subject to change without you knowing it. Just be aware that rate hikes could happen—but most business credit card issuers extend similar protections just as a courtesy.
- Business credit card limits tend to be higher. When you apply for a business credit card, you might get approved for a higher credit limit than you would with a personal credit card.This is largely due to the fact that businesses tend to both make more money and spend more money than consumers do. In the end, this is a great thing for your business: You can use this kind of credit card to make the larger purchases for your business without having to worry about hurting your credit utilization ratio.
- Business credit cards affect business credit (and sometimes personal credit). When you apply for a business credit card, odds are you’ll use your personal credit score you’ve built up from your lifetime of borrowing to be approved for the card.But once you have the card for your business, your behavior on the card will affect your business’s credit score—showing how responsible your business is when it comes to paying debts. So, in most cases, expect that business credit card issuers will report to the business credit card bureaus.But some will also report to the personal credit bureaus—specifically American Express and Capital One. Chase, on the other hand, exclusively reports to the business credit bureaus unless you fall behind on payments. If you’re not sure how your business credit card issuer reports your behavior, just call them up to find out.
- Balance payments are applied differently. When you pay your balance on your business credit card, it’ll be applied a little differently than your personal credit card payments would. This is important to know if you’re paying different interest rates on the same card—say, after taking out a cash advance from the card. If you were to pay your balance on a personal card in this scenario, the issuer legally has to apply your payment to the portion of the balance subject to the highest interest rate first, and then apply your payment from there—saving you money on interest payments. This isn’t the case with business credit card payments. In the same scenario, a business credit card issuer doesn’t legally have to pay off your balance according to which interest rate you’ll be charged.
When you think about how the mechanics of a credit card works, personal and business credit cards are one in the same. And you’ve mastered the art of managing your credit card from years of using them responsibly.
But when you get down to the specifics, there are a few differences to be aware of.
How to Choose Your Business Credit Card
Like choosing your personal credit card, searching for the best business credit card essentially comes down to a few factors to consider.
You’ll have to look closely at what you care about in a card, and how your business credit cards will fit the needs of your business.
In general, keep the following factors in mind while you go about your business credit card search:
- Rates and fees. Do you have no interest in paying an annual fee—even if it’s offset by a substantial rewards earning rate? Then you should be looking specifically for business credit cards that don’t charge annual fees. (The SimplyCash Plus from American Express or the Chase Ink Cash Business Credit Card could be good bets.)Or you could filter your search for business credit cards that have long 0% intro APR periods—making it so you can use a business credit card a lot like a free loan. And finally, you might care more about transferring your balance from other, more expensive credit cards to your new business credit card. In this scenario, you’d want to check out business credit cards with a 0% balance transfer APR.
- Rewards and perks. There are some great business credit cards for rewards and bonus points on the market. And when you’re searching for a card, you’ll want to keep these in mind so you get a business credit card that makes sense for your company’s needs. If you’re always traveling for business, a travel rewards business credit card makes a ton of sense. (If this is you, the Business Platinum Card from American Express is a practically unbeatable option.)But maybe you want to just earn cash back on categories you spend on frequently. In this case, search for cards that have spending categories that fit your habits. And if you’d prefer to earn valuable bonus points when you spend on certain categories, you can filter your credit card search for that, too.
- Commonly accepted cards. Don’t forget to consider which cards are commonly accepted with suppliers and vendors you’re always purchasing from. You wouldn’t want to get going with a card that essentially has no value to your business if you can’t use it to make those purchases.
- Business credit cards vs. business charge cards. When you’re on the hunt for a business credit card, don’t forget to look at business charge cards as well. Business charge cards extend lines of credit just like business credit cards do, but there’s no preset limit to the card and you have to pay your balance every month.Depending on the structure of your business and your purchasing needs, a business charge card could be the way to go. Learn more about what makes these two products differenthere.
When it comes down to it, searching for your business credit card is all about what you care about in your card. Pay attention to the issues above, and you’re well on your way to finding the right business credit card for your company.
Best Practices When Using your Business Credit Card
So, you’ve got the business credit card in your back pocket—along with all your other personal credit cards.
What should you keep top-of-mind when you’re using this new card?
Some things to note when using your business credit card specifically are the following:
- Be sure to never mix business and personal expenses.
- Monitor your interest rates on your business credit card, and factor any increases to your rate in your budget.
- Deduct your interest rate on your business credit card on your taxes!
- Only charge the essentials you need for your business, and don’t take on too much debt.
Essentially, your behavior on your business credit card should be the same as it is with your personal credit card: Pay your balance in full, on time, and don’t put too much on the card.
From your first credit card to now your business credit card, you’ve got the whole credit game down. As always, practice the best borrowing behavior possible, and watch your business credit score grow!
from Fundera Ledger https://www.fundera.com/blog/first-credit-card