That first credit card is a financial rite of passage for many Americans. For many, it’s their first method of borrowing money for consumer goods without putting something on the line – no house to anchor a mortgage, no car to anchor a car loan. A credit card provides easy access to borrowed money. It’s also a powerful way to establish a positive credit history for yourself, one that will be very useful for acquiring a low-interest loan in the future.
Of course, that access is a double-edged sword. Unless you’re paying off the card in full every month, you’re going to be paying hefty interest. You’re also opening yourself up to other risks, such as identity theft.
The decision to get that first credit card rides right on that fine line. It has the potential to be incredibly useful … and it also has the potential to be a financial disaster. Here are five things you can do to ensure you wind up on the better side of that line.
Don’t sign up for one in the heat of the moment. For many people, that first credit card is picked up in the heat of the moment, often as a way to save a little money on a purchase at a store. Don’t step into that trap. Often, credit cards sold at the checkout line come with high interest rates, low credit lines and bonuses that really aren’t worth very much in the big scheme of things.
Instead, shop around for your first credit card. Consider the places you shop regularly and look for a card that offers bonuses that line up well with your frequent retailers. If you can, choose a card with a low interest rate because no matter how much people pledge not to carry a balance, many often do, and a low interest rate will save significant money.
Don’t lie about your income. “Fudging” your income a little might seem like a good idea at first, as it can earn you a higher line of credit. However, having an unwarranted line of credit can actually be a mild negative for your credit score, making it at least a little harder to get a low-interest rate on a future loan.
Be honest on your application. You’ll get a credit line that’s in line with your income and current credit state, which is the best result in terms of building your credit in a healthy manner.
Don’t co-sign on a card with someone who is a financial mess. Many people get their first credit card with a co-signer in order to leverage the other person’s solid credit score into a better interest rate or card deal. That might work on the surface, but you want to make sure that the person you’re signing up with is actually in good financial shape.
If you find yourself sharing a credit card account with someone who makes bad financial moves, you may find yourself facing a bill with a big balance on it that you had nothing to do with, or you may find yourself with a canceled card, thanks to actions outside of your control. You may even find your own credit damaged, due to no actions of your own. If you co-sign, co-sign only with a trusted partner.
Don’t sign up for lots of cards and debt at once. If you’re signing up for your first card, don’t pair it with other credit cards and loans. The simple act of applying for multiple cards and loans at once will create a temporary negative impact on your credit score, which can result in loan denials, higher interest rates or even a rejection of an apartment rental application.
Get your first card and use it responsibly on its own for a while before considering other cards or signing up for other loans.
Don’t miss your payments. Once you have your fresh new credit card, keep a careful eye on your mailbox. When a credit card bill comes in, pay it promptly, and make that prompt payment into a habit. Ideally, pay the balance in full each month.
Being late on a payment incurs a late fee of some kind, which is money out of your pocket, simply due to a lack of personal organization. Allowing a balance to stay on your card – meaning that you did not pay your bill in full – means that you’re paying interest to the credit card company, which is, again, money straight out of your pocket with nothing in return. Avoid both traps – pay your bills in full and promptly. Not only will this keep you from losing money to the credit card company, it’ll keep your credit score in pristine shape.
These simple steps will help you sign up for a great credit card and use it to build a positive credit history for yourself, which will help you with future financial decisions and opportunities. Good luck.