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Signing up for a credit card is often one of the first major financial decisions consumers make on their own. Whether you’re a student or someone who has never signed up for a card, you should try to make a well-informed decision. Use this guide to learn about the most important considerations to make when getting your first credit card.
Why you need your first credit card
There are two major reasons behind why getting your first credit card is a good move — it can help you build a credit history and it can save you money through reward programs. The benefits from these two factors can have a huge impact on your overall financial standing. As long as you manage to avoid the negative aspects of credit cards, there is very little reason to delay applying.
Credit scores: The most important reason to sign up for your first credit card
Credit cards are one of the first ways most people begin establishing their credit history. Opening a student or secured credit card account helps put you on the radar with the three major reporting agencies — Experian, Equifax and TransUnion. Having a credit history can help you, in the future, qualify for loans, mortgages or even to get a job, as some employers pull credit reports of their candidates.
The sooner you open up a credit card, the better it will be for your credit score. A majority of lending decisions today are based on your FICO Score. The five chief factors that impact this model are:
- Credit history length (15%)
- Credit inquiries (10%)
- Debt burden (30%)
- Payment history (35%)
- Types of open credit accounts (10%).
As soon as you sign up for your first credit card, you can start to build up your payment history and credit history length, which together account for 50% of a FICO Score.
One thing to know when you’re new to credit is that building up a credit file can take a long time. The most popular credit scores range from 300 to 850, and anything above 700 is generally considered "good". It can take several years of never missing payments and growing the average age of your credit accounts to get there. That is why it’s important to sign up for your first credit card as soon as possible.
Note: The "credit history length" we mentioned above looks at the age of your oldest account and newest account as well as the average age of all your credit accounts. Therefore, if you opened up your first credit card two years ago, and a brand new one today, your average age of credit would be one year. If you’re just starting to build your credit score, it’s better to get your first card and allow that account to mature, before you go ahead and open up new ones.
Rewards: an opportunity to save money
Another reason to prefer credit cards to other modes of payment is the rewards they can earn you. Many credit cards earn consumers points, miles or cash back with every purchase. This translates to a small percentage return on every transaction — typically between 1% and 2%. While it may not seem like much, it does add up over time. According to the Bureau of Labor Statistics (BLS), the average consumer spends roughly $1,765 each month on expenses that could be charged to a credit card. Assuming even the bare minimum 1% return, which can translate to a $211.75 value every year.
Individuals applying for their first credit card will likely not qualify for cards with high rewards rates. However, consider the credit score building factor: The sooner you sign up and begin working on improving your score, the sooner you will be able to improve your score and qualify for better cards.
Why you shouldn’t get a credit card
You shouldn't open a credit card account if you believe it will drive you to debt. Credit cards allow consumers to spend beyond their means, and to pay for everyday items in installments. This is dangerous if the user doesn't show self-control and buys things they can't afford. Credit card debt is considered bad debt, since the interest you’ll pay is extremely high. The average credit card interest rate currently stands at almost 16%.
The only people who should be using credit cards are those who pay off all their purchases at the end of the month. Realistically, this is not always how things turn out. Certain economic conditions may force individuals to become revolvers, or people who carry a balance month to month. However, if it is within your means to avoid credit card interest, you should always do so. No matter how many rewards you earn, you will not outpace the money you’d sink into interest payments.
If you have trouble controlling your spending, it is recommended you don’t open up a credit card until you manage to get that under control. The average credit card debt per household in the United States currently sits at $6,270. This figure is also quickly rising. If mishandled, it can take many years to pay off such a debt.
What are some good first credit cards to get?
When you are shopping for your first credit card, you should narrow down your choices to student cards and secured credit cards. These will be available to you, even if you don’t have a credit file. Assuming you plan to always pay off your credit card, focus on maximizing your rewards. Otherwise, your priority should be getting a first credit card with the lowest possible interest.
To help consumers select a rewards credit card that best fits their spending, we built a calculator that helps estimate each card’s rewards based on how they spend. If you want to learn more about these card offers, you can check out our roundup of best starter credit cards.
Understanding credit card bills: How to pay off your credit card
Once you open up your first credit card, you should understand how your bill works. You can read our comprehensive guide on credit card billing here, or read the following summary for the high-level details.
Due date. Your credit card bill will be due on the same day every month. Therefore, if your first bill is due on the third day of the month, you can expect the following bills to fall on the third of each subsequent month. This should make it easier to anticipate bills, and not miss a payment.
Minimum payment. Every month, you will be required to pay at least a small portion of the total outstanding balance on the credit card — this is referred to as a minimum payment. Typically, most banks require users to pay around 1% of the total balance plus interest as the minimum. It is highly recommended that credit card users always pay more than that amount, or else interest charges will mount up faster.
Grace period. This is what allows you to make purchases on a credit card and pay them off in full at the end of the month without it costing you extra. Every credit card comes with a grace period for interest that lasts between 21 and 25 days. That means you will not be charged interest on a purchase for the duration of the grace period.
Foreign transaction fees. Whenever you use your credit card outside of the United States, you will be charged a foreign transaction fee. This can cost you anywhere between 2.7% and 3% of each purchase. Note that some credit cards come with no foreign transaction fees and are well-suited for international travelers.
Cash advances. When you use a credit card to take out money at an ATM it is classified as a cash advance. This will result in an extra charge (somewhere around 4% of the total money withdrawn), significantly higher APR, and no grace period.
Challenging purchases. If an item that you didn’t authorize appears on your credit card bill you can notify your issuer and they may reverse it. This is extremely helpful in case your card information was stolen and used fraudulently. By law, you cannot be held liable for more than $50 worth of fraud purchases per incident. However, most issuers completely waive your liability.