Your First Credit Card: The 5 Best Sources
- Your bank. If you’ve had a checking or savings account with a certain bank, this existing relationship will up your odds for qualifying for your first credit card.
- Credit cards for no credit history.These will take some work to find them, but almost all the major credit issuers offer “limited history” credit cards.
- Secured credit cards. A secured credit card is “secured” by a deposit you make against the credit limit of the credit card, making it less risky for issuers to extend credit to those with no credit history.
- Store and retail cards. These cards are typically easier to qualify for. On the downside, they come with higher interest rates and can only be used with a specific brand.
- Cosigners. Your cosigner’s income and credit history will be used to determine your eligibility for the card, but their credit will be affected by card activity.
The time has come—you need your first credit card. Getting your first credit card is a savvy thing to do, for whatever reason you’ve decided to take this financial step.
Applying for and getting approved for your first credit card is a really pivotal moment on your path to become financially independent. But, as you likely know, it comes with some uncertainty and unknowns. And a lot of responsibility, too.
How do you even go about getting your first credit card with no credit history? And what do you do once you have it?
They’re all absolutely great questions—and that you’re even asking them means you’re well on your way to being a good candidate your first credit card. And once you’ve made it through our guide on how to get your first credit card, you’ll be able to answer these crucial questions for yourself.
Let’s walk through the trajectory of getting your first credit card, the best first credit cards to set your sights on, and what to do to set yourself up for credit success down the line.
Getting the Best First Credit Card Possible, and What to Do Once You’ve Got It
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 anxious as you likely are to steer your own financial destiny, pump the brakes!
Searching for your first credit card is a process that has to happen carefully deliberately. Here’s a checklist of everything you’ll need to think about as you’re searching for your first credit card (and making certain it’s 100% the right time for it, too!):
Step 1: Make Sure You’re Ready for Your First Credit Card
Really think carefully about whether you’re ready to take on your first credit card ever. Having a credit card in your name requires financial responsibility. You need to be prepared to keep track of what you’ve spent on your credit card, and pay off that balance 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, ask yourself this, too: 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.
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.
Step 2: Learn About Applying for a Credit Card for the First Time
Next, fully prepare yourself for the realities of applying for your first credit card in today’s market. Major credit card issuers used to offer easy credit to college students—this meant an easy way to get a first credit card. Which sounds great… but such easy credit got lots of students and young people quickly into debt. And that type of openness wreaked havoc, which put this these practices squarely in the past.
After some financial reform, the good thing is that you’re protected from taking on debt before you’re ready. The tough part about that, though, is that it’s also harder to secure a first credit card with no credit history.
If you’re under 21, you can technically get a credit card. Issuers will usually require that you have a full-time job, though, which makes it tough for most students to qualify. For credit card applicants over 21, it’s still pretty tough to get a first credit card—but a little easier now that you’ve crossed the threshold.
All that said, though, know that if you’re applying for your first credit card and you don’t have much or no credit history at all, that limited credit history will be the main reason for the difficulty you’ll face qualifying for a card. Even if you’re well into your 30s or 40s, that’s going to be the case, too—so it’s not an age thing.
Step 3: Know Your Best First Credit Card Options
With that in mind, which first credit card options are realistically available to you? To know, check out these first credit card possibilities:
- Your bank: If you’ve had a checking or savings account in your name with a certain bank for a while, head to your bank. Your best bet for securing your first credit card might be with that very same financial institution due to your existing relationship with them.
- Credit cards for 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—and probably do—come with a higher interest rate.
- Secured credit cards: Another great option for your first credit card is a secured credit card. A secured credit card is “secured” by a deposit you make against the credit limit of the credit card, making it less risky for issuers to extend credit to those with no credit history. If you’re not able to access unsecured credit through your first credit card, then secured cards like the Capital One Secured Mastercard are one of your best options for building credit history.
- 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. 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.
- Cosigners. If you’re having a tough time getting approved for your first credit card, another option is to get a cosigner on the card. If you can get a parent or trusted adult to cosign 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 cosigner 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 cosigner, and use this first credit card very responsibly.
Step 4: Pay on Time, Every Time
So, you’ve got your first credit card in your pocket. You’ve made it over the first hurdle of owning your credit history. When you look at the meaning of your credit score and what comprises 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—aka 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.
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.
Step 5: Only Spend What You Can 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.
Step 6: Monitor 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.
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.)
Step 7: 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 up-to-date with your credit report.
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. (One out of five credit reports have errors in them, so it’s worth checking to see if you’re being dinged for activities you didn’t do.)
Graduating From Your First Credit Card to New Credit 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 the time comes 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. Every time you apply for a new credit card, the credit card issuer will do a hard pull of 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.
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.
Moving on to Your First Business Credit Card
As you’ve likely realized by this point in our guide to first credit cards, credit begets credit. And the same goes for business credit, too.
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. So when you need to grow your company with a small business loan, or need to finance essential purchases with a business credit card, you’ll have an easier time doing so. 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
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.
How Your First Business Credit Card Will Differ From Your First 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 between business and personal credit cards:
- Business credit card rewards are geared toward businesses, and their rewards programs reflect that.
- Small business credit cards might not have the same consumer protections.
- Business credit card limits tend to be higher.
- Business credit cards affect business credit (and sometimes personal credit).
- Balance payments are applied differently.
How to Choose Your First 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:
- What kind of rates and fees you’re okay with your first business credit card costing.
- The rewards and perks you want your first business credit card to offer.
- How universally accept the card network is for any potential business credit card options.
- Whether you want your first business card to be a credit card or a charge card.
Best Practices When Using Your First Business Credit Card
And, much like your personal credit card, there are a few things to know when using your first business credit card, too. A few things to keep top-of-mind as you use this new card:
- 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 now to your first 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.
Getting Your First Credit Card Ever: Our Final Thoughts
There you have it! The comprehensive guide to getting the best first credit card possible for your situation. Whether you need your first personal credit card or your first business card, there are lots of options out there for you—even if you’re working with limited credit history. Just follow the seven steps to best find and apply for your first credit card, and you’ll be well on your way to accumulating positive credit history and accessing even more credit in the future.
The post Ready for Your First Credit Card Ever? Here Are 7 Steps to Credit Success appeared first on Fundera Ledger.
from Fundera Ledger https://www.fundera.com/blog/first-credit-card/
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