Embarking on the journey of owning your first credit card comes with newfound financial freedom and responsibility.
Venturing into the world of credit, understanding the ins and outs is key to navigating this financial tool wisely.
In this guide, we’ll explore nine essential tips tailored for first-time cardholders, aiming to steer clear of common financial pitfalls. These insights will empower you to make informed decisions, cultivate healthy credit habits, and lay a strong foundation for a secure financial future.
What’s Ahead…
Understand How the Credit Card Works
Before getting your first credit card it is imperative to your financial health to familiarize yourself with how credit cards work.
A few things that are necessary to understand include the annual interest rate, your credit limit, statement date, payment date, and the minimum payment amount.
In short, the annual interest rate represents the yearly cost of borrowing on a credit card if the balance isn’t paid in full. It’s expressed as a percentage. Most credit cards, especially the free ones have interest rates between 16% and 21%.
Therefore, if a credit card has an annual interest rate of 18%, and you have a balance of $1,000 (and leave it on the card for the whole year), you might accrue $180 in interest annually if the balance isn’t paid off.
The credit limit is the maximum amount you’re allowed to borrow on your credit card. It’s determined by the card issuer based on your creditworthiness.
In general the minimum credit limit for a first time credit card holder is at least $500. This means that you cannot spend more than that amount on the card without paying down the balance.
The statement date is the date when your credit card statement is generated, showing transactions, payments, and balances for a specific period. So if your statement date is the 15th of each month, all transactions made between the previous statement date and the current one will be included in that statement.
The payment date is the deadline by which you must make at least the minimum payment on your credit card to avoid late fees and penalties. Usually you will get between 10 to 15 days grace period from the statement date to the due date. If your due date is the 5th of the month, you need to ensure that at least the minimum payment is paid by that date as it may negatively impact your credit rating.
Finally, the minimum payment is the smallest amount you’re required to pay on your credit card statement by the due date to keep the account in good standing. For a credit card with a minimum payment of $25 and a balance of $500, you’re required to pay at least $25 by the due date to avoid penalties.
Knowing these basics will help you understand how the credit card system works and to use your first credit card to your advantage, building up your credit score and ensuring your financial health.
Choose Wisely
There are a ton of options when it comes to credit cards. In order to choose the right card for you, here are a few things you may want to consider.
To make it easy on your self, you may want to get your first credit card from the institution where you do you day-to-day banking. However, there are many other financial institutions that offer credit cards, even though you do not bank with them or they do not offer general day-to-day banking at all.
The question now becomes, what credit cards does your financial institution offer? Visa? MasterCard? American Express? In general, Visa and MasterCard are widely accepted globally, often having broader acceptance compared to American Express, especially in smaller merchants or internationally. So depending on your needs, it may be wise to consider the acceptance of the card when applying for your first credit card.
Another thing to consider when it comes to your first credit card, are annual fees. Ideally, you’d want a card with no annual fees. Though keep in mind that those cards are often the ones with the highest annual interest rate.
Finally, you may want to consider other perks the credit card offers. Are you interested in travel points, cashback, dividends and other point programs? Some cards also offer travel insurance and extended warranties on major purchases.
These are just a few main things to consider when choosing a credit card to ensure that your first credit card truly suits your needs.
Be Wary of Introductory Offers
Some introductory offers are worthy of exploration, while others can easily become a trap if you don’t consider the potential consequences.
For instance, some cards offer enhanced rewards or cashback rates for a limited time after account opening. For example, earning double or triple points on specific categories for the first few months are some popular incentives.
Occasionally, new cardholders can earn a bonus after spending a certain amount within the first few months of opening the account. For instance, earning a cash bonus or a substantial amount of points/miles after spending a specified sum, like $500, in the first three months.
You need to be careful with this kind of incentive as it can be out of your budget to spend that amount of money in such a short time. And trying to get this incentive can easily put you in debt.
A promotional 0% annual percentage rate (APR) on purchases or balance transfers for an initial period, typically ranging from 6 to 18 months is another popular incentive. This allows cardholders to make purchases or transfer balances without accruing interest during this period.
If you use this incentive, it is imperative that you keep track of the end date of this incentive in order to avoid unnecessary fees and interest payments.
Certain cards waive the annual fee for the first year as an introductory offer, allowing cardholders to experience the benefits of the card without paying the fee initially.
Again, beware of the fact that next year you’ll be expected to pay the annual fee. It may be wise to consider if the perks offered by that card are worth the fee and if you’re actually willing and able to pay it.
Although not all, these are the most popular incentives used by credit card companies to make their credit cards attractive to potential clients.
Budget
One of the pitfalls of using a credit card is that some see it as “free money”. Thinking about credit cards that way will inevitably lead to poor financial health and bad credit.
It is important to set a clear budget and stick to it. Only spend what you can afford to pay back in full each month to avoid accumulating debt and interest charges.
Make paying off your balance a priority. This strategy will help you build good credit and keep you out of dept, all the while helping you accumulate your rewards.
Track Expenses
Keeping track of your expenses is crucial to ensure that you’re not overspending and degrading your financial health.
Therefore, keep a record of your purchases and review your statements regularly. It helps you track spending habits, detect any errors, and stay within your budget.
Be Aware of Your Credit Limit
Be aware of your credit limit and never max it out. Using your card occasionally as opposed to making it your main method of payment will ensure your financial health.
Keeping your credit utilization low (using a small percentage of your available credit) will positively impact your credit score.
Pay on Time
As mentioned above, ideally, you may want to pay off your credit card in full before the due date.
However, if, on occasion, that is not an option, ensurer that you always pay at least the minimum payment by the due date to avoid late fees and negative impacts on your credit score and your financial health.
Use it Only for Emergencies
Even though using your credit card from time to time is good for building up your credit score, you may consider using cash or debit for impulse purchases or non-essential items. This will help you avoid debt and keep your money in check.
Therefore, it may be a good idea to reserve your credit card use for emergencies or planned purchases within your budget.
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Avoid Cash Advances
If there is one thing to avoid at all cost when using your first credit card, it would be cash advance.
Cash advance is when you withdraw cash from an ATM or receive cash equivalents like traveler’s checks or money orders using their credit card. This feature provides immediate access to cash, but it operates differently than making regular purchases with a credit card.
Credit card companies often charge higher fees for cash advances compared to regular transactions. These fees can include upfront charges or a percentage of the advanced amount, making cash advances immediately costly.
Cash advances typically incur higher interest rates than regular purchases. Interest begins accruing immediately from the day of the cash advance, unlike the grace period offered for regular purchases, leading to increased interest charges.
In addition, cash advances can negatively impact your credit score. High cash advance usage may indicate financial stress or irresponsible financial behavior, which can be viewed unfavorably by creditors and credit scoring models.
It would be much better for you to consider using a loan or bank issued credit line instead of a credit card when you’re in need of cash.
BONUS TIP: Monitor Your Credit Score
As mentioned before, credit cards affect your credit score. Depending on your use of credit, the score can impact your borrowing privileges in a positive or negative way.
So keep an eye on your credit score regularly to ensure it’s accurate and to track your financial progress. Use tools such as Credit Karma or AnnualCreditReport.com to check your score.
Conclusion
As you embark on this credit card journey, remember that responsible usage is the cornerstone of financial well-being.
By implementing these nine essential tips, you’ve equipped yourself with the knowledge to navigate the complexities of credit, avoid common pitfalls, and foster a healthy relationship with your card. Your first credit card isn’t just a financial tool; it’s an opportunity to build a solid credit history and pave the way towards achieving your long-term financial goals.
Stay vigilant, stay informed, and let your credit journey be a stepping stone toward a financially secure future.
