I’d like to open my first credit card and am looking for some advice. I am a year out of college, so I won’t be spending a ton of money on the card, under $1000/month (and plan on paying it off immediately every month). Since I won’t be spending much money on it, I would like a card with rewards that I will be able to realistically use. Besides that, being new to the credit card search, what else should I look for? – Nicole, Washington, DC
Opening your first credit card is a step in the right financial direction! It’s important to establish your credit early on – it’ll determine your eligibility for loans, mortgages, and new lines of credit throughout your lifetime, and your credit history is a big part of that credit score. For more about the breakdown of how your credit score is determined – and what qualifies as a good score – take a look at this post from my blog and watch this video from the Today Show this morning.
Next, you should know that $1,000/month is actually considered to be a very active user by lenders. It’s a good idea, though, to limit your spending to what you know you’ll be able to pay off each month. Since you plan to pay your full balance, interest rates might not play a big role in your decision – but it’s something to consider if you think you might use it if you had an emergency. These days, it’s tough to get a good interest rate – especially if you don’t have much of a credit history.
Despite what you might think, card issuers look at a “blank slate” and automatically view it as being a higher risk, as a measure to protect themselves. You can, of course, prove them wrong by paying your bills in full and on time each month, but that will take a bit of time. If you have some credit established (which you should if you have student loans or a car loan), and you’ve maintained good standing with your lender, then you can expect to get fairly low interest rates. “You should expect 7.9% from a credit union, or 12.9-14.9% from a bank or card issuer,” says John Ulzheimer of Credit.com.
Credit history or not, don’t panic if you get turned down for a card. New legislation regulates the age at which you can open a credit card (21), and in the credit crunch, issuers are becoming choosier about which customers they approve. So if you get turned down, try opening a secured credit card. A secured card allows you to give the issuer a certain amount of money upfront, which then becomes your credit limit. After about 18 months of good behavior, most of these cards will turn into a regular credit card.
However, if you do qualify for a credit card today, it’s a good idea to shop around before you open an account. Try lowcards.com to look at the options available. When it comes to rewards programs, Ulzheimer warns that there are some traps to be aware of. “Rewards cards are generally designed to reward the issuer rather than the cardholder,” he says, and many have annual fees. “Cash-back cards are the best of the breed because cash has no blackout dates,” says Ulzheimer, “and one that I like, that doesn’t have an annual fee is the cash back card from Discover.” Take a look around and decide what will work best for you.
And if you really are planning to charge and then pay off $1000 a month, you want a credit limit that’s significantly higher. Why? Because one of the things that determines your eventual credit score is utilization, the amount of credit available to you that you’re actually using. If you get a credit limit of $1500 and use $1000, you’re using 66% and that’s way too much. Try to use only 10 to 30 percent of your available credit in the beginning to establish the best score. Use a debit card for the rest of your spending. Then, when the card issuer offers to raise your limit, you can say yes and charge more.
Once you open the card, be sure to maintain good standing with your lender. Two simple rules? “Never revolve a balance, and never miss a due date,” says Ulzheimer. “This keeps your issuer happy, FICO happy, the credit bureaus happy, and everyone happy.” Also, make sure you don’t get into the dangerous habit of using a credit card to substitute for income. It’s a really big hole to get out of if you do – and at a young age, it’s best to keep yourself from digging it at all.