There are more than 300 million open credit card accounts in America today. That’s a lot of plastic!
If you’re not one of those three hundred million, but want to be, you’re probably a little overwhelmed by all your credit card choices.
Which one should you pick? How do you even apply? What’s a limit and what in the world is APR?
Those are all common questions. But opening a credit card doesn’t have to be a stressful experience. We’ve got a guide on what you need to know below.
The Application Will Ask Very Specific Questions
When you apply for a credit card, the application will ask you things you may not have thought about. If you’re in college or still supported by your parents, you may not know how much you “make” or live on in a year.
You could ask your parents what they spend on you in a year, but you may not want to learn the answer to that. It’s also a lot of math to ask them to do.
The easiest way to determine your “income” is to multiply your rent and what you spend on groceries/utilities by 12. Then add in your college tuition and whatever else your parents give you funds for.
If you have a job, you need to include what you make from that too. It should be listed on your tax form you get in February every year.
While this seems like a lot of work, it’s worth it. You’ll get a higher credit limit and better terms, the higher the number is.
However, make sure you’re careful about what you’re counting as income, because if you’re funding your education with loans, then these don’t count as income. Here’s a good article that reviews what can and can’t be counted as income for students.
You May Want to Start as An Authorized User
So let’s say you don’t want to go through all the math we just talked about above, but you still want a credit card (and you’re a dependent). You can ask your parents or guardians to make you an authorized user on their account.
Instead of getting your “own” credit card, you get a credit card that has access to their account. Obviously, they’ll need to trust you for this whole arrangement to work.
Your bill will get paid along with their activity from the month. How you pay them back for what you used is up to the three of you.
By having a credit card on their account – given they have good credit – you’ll start to build a credit history. They’ll have access to your account and hopefully can teach you how not to over-spend.
You May Get a Low Limit
If you don’t have much (or any) credit and you don’t make that much money, the banks will give you a low credit limit. For some accounts low means five hundred dollars and for others it means 2,500. It all depends on your finances and the credit card’s terms.
Low limits are a good thing, though they can seem frustrating. They’re there as a cautionary boundary from the credit card company, who don’t know what kind of borrower you’ll be.
Because you’re reading this guide and getting educated, we feel like you’ll be a responsible one.
Which means not going crazy when you get your first card. You want to use 30% or less of your available credit.
That means if you have a credit limit of $1000, it’s really a limit of $300. The farther above this threshold you go, the worse your credit gets.
So many students and young people fall into this trap, you don’t want to be one of them.
You May Have Better Luck with a Secured Card
Let’s say you don’t have any credit history and no one can add you to their account. And on top of that, you don’t make that much money. You’re not looking like a very attractive customer for the credit card companies right now.
So, they may give you a credit card but it probably won’t have great rates.
You could get better rates if you ask about and apply for a secured credit card. This can be a great option for building your credit, but comes with a big catch: secured credit cards require a deposit in order to establish your credit line.
So, if you put a deposit of $500 onto your card, you now have a credit limit of $500. As long as you pay back the card on a monthly basis, you get the $500 credit limit back. When you close your account, you then get the deposit back as well.
However, if you fail to pay, the credit card company then keeps your deposit. So, as long as you have the money to put down as a deposit, this might be a good option to look into.
Fee-Free Offers Aren’t Forever
A lot of credit cards attract new users because they say that they have no annual fee or APR, but that doesn’t last forever. What new card applicants rarely look at is the small print that says “for the first year” or six months.
These introductory offers are great if you’re not using a lot of credit. But when the terms wear off, you can get hit with interest and fees, hard. Your payment that was $25 a month may now be $35 or $40.
This is how credit card companies make money. The same is true if you try to move the balance from one card to another – but we’re not there yet.
Speaking of fees, let’s look at a quick fee breakdown.
You May Pay Fees
Some people think interest is where credit cards get you, but fees are a good honey pot for them too. You can get hit with fees by simply going abroad or if you exceed your credit limit. Here’s a quick fee-glossary.
An annual fee is something you pay when you have a low credit score or when your card offers a high level of rewards. It’s a one-time a year (annual) fee that gets added to your account balance.
The month and the amount you pay are determined on a card-by-card basis, so be sure to read that giant packet of information that comes when you get your first card.
Foreign Transaction Fee
When you go to another country, that has another currency, your bank has to do the conversions. Usually, there’s a fee for that, which may be 3 or 4% of whatever you spend.
If you’re getting charged 3% on everything, it may be better to get out cash. Your debit card will charge you a foreign transaction fee as well, but it’ll be a one-time thing.
Also – make sure you call your credit card and let them know that you plan to use your card overseas. If you don’t give them a heads up, they may freeze your card due to suspected fraud.
Late Payment Fee
If you don’t make your payment on time, you’ll get charged a fee. Some cards have a grace period or don’t charge you a fee the first time it happens.
It’s usually in the range of $25 or $ 35. If you call them, apologize and have good payment history, most will reverse it.
The best way to avoid late payment fees is to set up automatic payments that link to your bank account.
Over the Limit Fee
We know you’re not going to max out your credit card because you’re a responsible user. But sometimes there’s an emergency and you end up doing it anyway.
Expect to get charged a fee if you go over your limit and that your card won’t work after you pass your credit limit.
(Some) Store Cards Are a Rip-Off
As our final point of this opening a credit card guide, let’s talk about store cards. Salespeople have quotes they need to make and they can get really pushy at the register.
Even if you’re going to get 30% off your purchase for signing up (!) with instant approval (!) these cards aren’t worth it. They usually have bad terms and high interest rates.
If you’re desperate for that discount apply for the card and then pay it off immediately. Put the credit card away and only ever use it at that store.
Know that every time you apply for a card, your credit dips a little, so you shouldn’t accept every pushy offer you get. You can see our guide to department store credit cards here.
Opening a Credit Card Successfully
With the tips above, an idea of your income, and a plan to not overspend, you should be ready to get your first chunk of plastic.
Know that how you treat your first card will follow you for the rest of your life, via your credit history and score. Do your future self a favor and be a responsible card owner.
We hope you liked this guide to opening a credit card. If you’re ready to learn which cards are best for you. Here are some other articles you might find helpful: