So, you want to open a credit card? It’s a good idea – most of the time.
Opening and using a credit card provides a simple way to establish and build credit history. Yes, certain credit cards can earn users rewards for cash back, travel miles, and redemption points, but the road to reward chasing is littered with people who slipped into credit card debt. Beware of your budget and your personality if you elect to pursue the path of reward chasing.
If you have trouble paying bills on time, saying no to purchases you can’t afford or just sense a credit card may not be a good idea for you – then trust your gut. While a credit card is a great tool to build financial health, it can also lead to painful consumer debt when used improperly.
Still think you’re ready to take on the responsibility of owning a credit card? Then let’s walk through how to select, understand, apply and manage your credit card.
Step One: Select your type of credit card
Credit cards were not made equal and we’re not just talking in terms of interest rates and rewards. Your unique situation will determine which credit card you should (and could) apply for.
Lenders understand college students aren’t flushed with cash. In fact, college students’ debt-to-income ratios are commonly skewed in the wrong direction. But lenders still make it possible for young adults to acquire credit cards through student card programs.
(Yes – they’re hopefully you’ll fall into debt.)
College students with an established bank account or credit union can likely get a credit card from their current financial institution. Other options include:
- Journey® Student Credit Card from Capital One®
- Citi Dividend Platinum Select Visa
Fine Print Alert: these cards often come with high interest rates – so be sure to read the tips in step four and mind your spending.
The secured card offers an option for anyone looking to build (or rebuild) his or her credit history.
With a secured card, a potential borrower puts down a deposit in exchange for a credit card from a lender. Often the borrower’s credit limit is the same amount as the deposit, but this isn’t always the case. In the instance of the Capital One® Secured Mastercard®, a borrower puts down a minimum deposit of $49, $99, or $200 for a $200 credit limit.
The deposit works as collateral for the lender. If the borrower cannot make payments, he or she will forfeit the deposit. If the borrower proves to be dependable over time, he or she will receive the deposit back after closing the secured card for a regular, unsecured credit card.
A secured card gives a lender a sense of assurance, while the borrower proves his or her responsibility. The borrower will see his or her credit score improving over six months to a year and can eventually leave behind the secured card for a traditional credit card.
Fine Print Alert: Be sure to take a secured card from an FDIC-insured organization, like your bank or local credit union. It’s important not to spend much on the card because your credit limit is likely to be quite low. Read more about secured cards here.
Store credit card
Odds are high you’ve been offered a store credit card at least once in your life. Store cashiers inquire if you’d like to open a store credit card, often in exchange for a certain percent off your purchases.
In general, a store card can be a trap into consumer debt. Just one round of missing a payment in full can lead to painful interest rates and leave consumers struggling to pay down their bill.
However, store cards often accept lower credit scores than traditional cards. Someone looking to rebuild credit, but carrying a score in the low 600s, could apply and feasibly get approved for a store card when they’d likely get rejected for a card from another lender.
Naturally, the bank hopes said person will have trouble paying off his bill – but the diligent borrower can use a store card to help rebuild a credit score.
Fine Print Alert: Store credit cards often have incredibly high APRs (annual percentage rate). For example, the Gap Visa starts at 25.74%. While a traditional card, like Capital One® Quicksilver® Cash Rewards Credit Card has a variable interest range of 14.24% - 24.24%. Read more about store credit cards here.
Traditional credit card
If you have a good to excellent credit score (often 680 or higher) then you’ll likely qualify for most credit cards. There is no need to deal with a store card and their monstrous APRs or secured cards with their low credit limits.
Do some research to see what type of credit card best suits your needs. You can use our cashback tool to input your spending habits and find a card to maximize your rewards.
Step Two: Understand the details of your card
Once you decide the type of card to apply for, it’s time to do your research.
You need to understand the details of your card, before signing on the dotted line.
Evaluate the APR (interest rate) on the card. It’s ideal to have a credit card with a low interest rate, like PenFed Power Cash Rewards Visa Signature® Card's 9.74%- 17.99% variable APR. You want to avoid ever paying interest, but in the case you do end up not being able to pay your bill in full, you need to understand the rate you’ll be charged.
Is there an annual fee associated with your card? With the exception of needing to get a secured card, don’t bother spending money on an annual fee when you’re starting out with a credit card. There are plenty of great cards with no annual fee – so why spend the extra $50 to $100?
What’s your credit limit? You likely won’t find out until after you’ve applied and been approved for a credit card. It’s imperative you remember your credit limit to avoid maxing out your card. In fact, you will want to stay well below your limit, but we’ll get to that in step four.
While we don’t recommend beginners focus on credit card rewards, it is good to understand the perks (if any) associated with your card. Be careful not to increase or change your spending habits simply to churn points.
Step Three: Apply for your card (and read the fine print)
The simplest step, apply for your card.
You can often apply online, but if you’d prefer to go in person then head down to your local bank or credit union.
Be sure to give that fine print one last look while you’re in the application process.
Step Four: Properly handle your credit card
Now that you have a credit card at your disposal, it’s time to use it properly.
- Understand the difference between borrowing and spending
Credit cards are structured to create debt. It’s a simple, not often discussed, truth. To avoid debt, it’s important you understand the difference between borrowing and spending. Do you set a strict budget and only spend what you can afford to pay off each month? Check for spending. If you eye a purchase you know you can’t afford and whip out your credit card, well that’s borrowing. Credit cards are often not the best route to go if you need to borrow money. However, if you are going to turn to a card for borrowing, then have the lowest interest rate you possibly can. Borrowing at a 15% to 26% interest rate (common on many cards) will do major harm to your bank account.
- Ignore “minimum due” and pay your bill in full
Credit card companies like to offer a “minimum due” in hopes customers will just pay a fraction of their total bill, so interest will start accruing. For credit card rookies, this can be incredibly confusing when they see minimum due on the first billing statement. The simplest thing to do is act as if the minimum due doesn’t exist. Always pay your bill in full. Paying the minimum just means you’ll end up paying more to your lender in the form of interest.
- Pay your bill on time
Paying your bill on time is possibly more important than paying your bill in full. Being just one day late on your credit card bill could crush your credit score. If the bill is due Tuesday, but you won’t have the money to pay in full until Wednesday, then pay as much as you can (at least the minimum) on Tuesday and pay off the remainder on Wednesday. In your mind, it might seem that paying it off in full a day later makes more sense than just paying part by the due date – but that isn’t how your lender will see the situation. They’ll see you as irresponsible for missing your payment deadline.
- Keep your utilization rate low
Your utilization rate (or ratio) is the amount of your overall credit limit you spend. Ideally, you should try to keep your credit used below 30% of your available credit (ie: if your available credit is $1,000 then only spend $300). A low utilization rate will show responsibility to lenders and help improve your credit score.
- Don’t do a cash advance
Don’t use your credit card like a debit card. Just don’t do it. You’ll be paying high interest rates (typically higher than store cards – around 25%) for withdrawing cash from an ATM.
- Careful where you share your card information
In the end, you need to protect your credit card. Odds are high you’ll experience fraud at one point in your life, but it’s best to be proactive and be careful where you share your credit card information.
Don’t forget to use your card, because a lender can discontinue an inactive card. If you feel a little uncomfortable using your card, but need to build your credit then buy one small item a month (perhaps a cup of coffee) and set up an automatic payment, so you know you’ll never be tardy with your bill.
Goldman Sachs Bank USA High-yield 12 Month CD
Synchrony Bank 12 Month CD
Synchrony Bank High Yield Savings
Barclays Online Savings Account
* All banks listed are a Member FDIC.