What To Know Before Applying For Your First Credit Card

Applying for a credit card? Not so fast. For first-time card seekers, there are a few things worth knowing, like how credit really works, what to do without good credit history and what to look out for when choosing a card.

Understand the Basics of Credit

To buy something on credit is to get it right away with the trust that it will be paid for later. Much like other types of loans, a credit card provides flexibility but comes with consequences if the trust of repayment is broken. Because a credit card lets users temporarily use money that’s not theirs as if it were their own, it’s entirely different from other types of electronic payment like debit cards and mobile payment apps. Importantly, it’s not uncommon for a credit limit (how much your card lets you spend) to be more money than someone actually has available or in the bank. This is what makes buying on credit a double-sided card.

Know Your Credit History

A credit history indicates trustworthiness as a borrower and is built up over time based on how reliably a person pays what is owed. Details of credit history are recorded by credit bureaus in a credit report and summarized by a three-digit number called a credit score. The higher a score, the better the credit.

Credit card issuers review these indicators of credit history alongside other factors to decide if someone seems reliable enough to loan money to. Using a credit card is the simplest and most common way to build credit history and thus presents a bit of a catch-22 for newcomers to credit.

How To Proceed if You Don’t Have Credit

Although it’s common to have no credit history before a first credit card, it’s worth double-checking through a credit bureau to see if another form of borrowing, like a student loan, has already initiated a credit history.

For those in the process of building (or rebuilding) a credit history, many credit cards will be off limits until stronger credit can be established. Instead, many companies offer “starter” cards that are easier to get approved for and can help open up better options down the road. Often, these are secured credit cards, which require a significant deposit upfront but still extend credit to the user, meaning responsible use will contribute positively to a credit history.

Another possibility for those without history is a card that allows a trusting friend or relative with good credit to co-sign, which puts the co-signer on the hook for any debt he or she can’t pay. As with a deposit, this “backup” greatly reduces the risk assumed by the credit card issuer and, in turn, increases chances of approval. Another similar option is to be added as an authorized user to a friend or family member’s account.

Those with questions about where to start should know that banks that already have existing relationships with credit card applicants may be more likely than others to approve an application. A bank that can see the banking history of someone to whom it might give a credit card can see how responsibly used bank accounts are. Credit cards offered through major stores and retailers are also known to have more lenient standards for approval. Student credit cards, available to college students only, can often offer comparatively favorable terms without requiring a credit history, a deposit or a co-signer.

Know How To Read a Schumer Box

Once shopping for a card, consumers are likely to encounter “boxes,” or tables, which disclose a credit card’s terms in a standardized format. Knowing what the information means is essential to choosing the right card. The Schumer Box is named in honor of Senator (then Congressman) Chuck Schumer, who pioneered the legislation requiring banks to be more transparent. Among other figures, Schumer Boxes always include:

• The annual percentage rate, or APR, which indicates the amount of interest a consumer will be charged on money owed if balances aren’t paid off on time. Also indicated is if this rate is variable (subject to change over time) or fixed.
• The method used to determine how much interest is owed
• The exact number of days in a billing cycle (it’s usually roughly a month)
• The cost of a flat annual fee, which some cards forgo
• A penalty APR and penalty fees: an elevated interest rate on money owed and further fees incurred if incomplete payments don’t meet a mandatory minimum
• A list of transaction fees for actions like cash advances, balance transfers and foreign transactions

Know Yourself

Many people find it difficult to spend borrowed money responsibly, despite the best of intentions. Today, approximately half of adults in the U.S. carry credit card debt. Credit card issuers actually profit most from these customers, who eventually spend much more than the value of what they originally purchased due to interest payments and penalty fees.

Accordingly, the universal wisdom on credit cards is to treat them as a convenient way to make normal payments, rather than as a line of credit for things you otherwise couldn’t afford. For all their ease of use (and usefulness building credit), credit cards are one of the least cost-efficient ways to borrow money.

Those who have any reason for concern—maybe those who consistently have trouble paying back friends or who struggle with impulse buying—should proceed carefully. Even something as minor as spending a high percentage of a credit limit (also known as utilization) can ding a credit score (ideally, aim to spend under 30% of a limit).

For those who believe some bumps along the road are inevitable, a card with as low an APR as possible—rather than one that touts special rewards or waived fees—is more likely to provide the best value. Conversely, for those confident about making full payments on time, accepting a high APR won’t be as likely to hurt and can help prioritize other benefits. Benefits are most always immediately negated upon accrual of any significant interest.

Be Cautious of Gimmicks, Promotions and Fine Print

The variety of benefits offered through credit cards today makes it easier than ever to find one that rewards spending and lifestyle habits. But keep in mind: A lot of effort and research goes into figuring out both what perks sound most enticing to consumers and what costs consumers are most likely to underestimate. Often, some of the most mundane-sounding benefits actually provide the best value. Carefully calculate the actual reward a card will provide. Using previous spending history is a great way to do this.

With cards centered on a specific reward or that give cash back for specific purchases, be clear about how much you will spend within the category. If you find yourself changing spending habits to justify prioritizing a particular benefit, the card is probably not the right fit. Remember that every credit card represents a compromise between perks and drawbacks—particularly so with starter cards—and due diligence in fully understanding its terms is important.

Don’t Exaggerate on Your Application

While applying, an issuer will ask questions about an applicant’s life and finances. It could be tempting to overstate income, understate debt or be misleading about other aspects of finances in order to appear more “creditworthy.” Beware: Penalties for getting caught lying on a credit application can involve jail time and large fines. Because an application for a credit card is a legal document being charged with fraud for lies or exaggerations remains a possibility.

Apply Soon

For those who know they’ll be responsible credit users, beginning as soon as possible means future applications for car loans, mortgages or other forms of borrowing will all be smoother sooner. How long an applicant for other lines of credit has been proving creditworthiness will be important to any institution that loans money. Time is the biggest advantage for young credit card applicants. For those who aren’t so young, time is the biggest disadvantage, so don’t wait too long to get started.