Understanding the ins and outs of borrowing is important before you swipe your first credit card. Just like with any type of financial responsibility, a card can either help or hurt your credit — it all depends on how you use it.
Determine Your Need
Getting your first credit card, when you haven’t yet established credit, can be something of a catch-22. Without any credit established, how do you qualify for a credit card? For many first timers, going with a secured or prepaid credit card is a great way to build credit.
Unlike unsecured credit cards, prepaid and secured cards require that you deposit money in advance with the credit card provider. If you’re unable to make a payment, the funds will cover your balance. Because you’re funding the credit card in advance, a great credit score or existing credit history isn’t required. But pay close attention to any extra fees — especially with prepaid cards.
Read the Fine Print
With almost a dizzying array of cards to choose from, start narrowing down your search by seeing which one best fits your financial needs. If you’re a college student, opt for a card that rewards good grades or offers cash back on purchases and has no annual fees. Travel often? Look for a travel rewards card. Many credit cards offer perks and incentives for specific spending habits. No matter which card you choose, make sure you understand the terms, annual interest rate and fees to help you figure out which card works best for you.
Keep Your Eyes on the Interest
Understanding your interest rate, often known as the annual percentage rate (APR), can help save money. Before applying, make sure you understand whether the rate is just introductory and when the introductory period will end. Many companies offer special rates for a period of time but increase rates when it ends. Take note of when the company will begin to charge interest on your purchases each month. Most provide grace periods and if you pay for the purchases before this period expires, you won’t have to pay interest on them.
It’s easy to get carried away when paying with credit. Unlike cash, you can lose track of how much you’re really spending. Make sure you’re able to repay not only the borrowed amount, but the interest as well.
Handling your credit card responsibly can help you build a sound credit history and pave the way for future life milestones. From applying for a mortgage, to getting car insurance — good credit may be the key to opportunity.