I didn’t get my first credit card until after I graduated college. I had never really needed one before, wasn’t totally sure how they worked and, to be honest, didn’t trust myself not to fall into a black hole of debt.
But once I was in the *real world,* it became one of those necessary evils, like going to the dentist, that I figured I had to face. So I took the first envelope in the growing stack of credit card offers that were being sent to me and said, “Sure, this will do.”
Clearly, this wasn’t the best vetting process. And while the card I chose turned out to be fine, I would have chosen differently if I’d had all the info. So, here’s the guide I wish I would have had so I could have chosen the best credit card for me.
How Credit Cards Work
First, the basics. When you buy something with a credit card, you basically get to pay for it later. (Unlike, say, a debit card, which takes the money from your bank account immediately.) Instead of owing the store, though, you’ll owe your credit card company, who provided the funds up front.
This can be great for when you need new tires now, but don’t get paid until next week — you can use your credit card and, by the time the bill comes, you’ll have the money. But it can also be dangerous if you start buying more than you can actually afford. Because if you don’t pay your bill each month, then you run into additional costs like late fees and interest (more on those later).
Why You Need One
Well, actually, you don’t *need* a credit card. And in some cases, like if you struggle to stick to a budget or already have credit card debt, you probably want to stay away from the plastic. (Here’s a helpful guide on when to use cash or credit.)
One good reason to get a credit card though, and why I finally bit the bullet, is to start building credit. While not the only contributing factor to your credit score, credit cards can play a large role in boosting (or hurting, if used incorrectly) your score, by demonstrating that you can make purchases and pay them off responsibly (or that you can’t). And your score, in turn, impacts everything from your chances of being approved for a home or auto loan to the interest you’ll pay on it.
Credit cards also offer a level of security that debit cards or cash don’t — for instance, if you lose your wallet, you can easily cancel your credit card and dispute any charges you didn’t make, but your cash is likely gone for good.
What to Look for in an Offer
Every credit card claims to be the best, so how do you choose the right one for you? Everyone’s financial situations, preferences and needs differ, but here are the terms to look out for to help make the decision easier.
APR: The annual percentage rate (APR) is the interest rate you’ll be charged on any outstanding balances. So if you don’t pay off your entire balance every month, you’ll owe interest on that balance, determined by your APR.
The lower APR you can get, the better — even if you never plan to carry a balance. But also look out for introductory offers, which typically boast a very low APR, such as 0%, but only for a limited time before jumping up to a higher amount. So be sure the number you see is permanent, or mark your calendar for when the introductory offer expires so you don’t get surprised with charges you weren’t expecting.
Annual Fee: Some credit card companies charge a yearly fee just for having their card, which can be anywhere from $15 to hundreds of dollars. Your first instinct may be to rule out any cards with an annual fee, but depending on the card’s rewards — like cash back or a travel credit — it could offset the annual fee and ultimately make it worth it.
Like with APR, though, make sure that what's stated as the annual fee — or lack thereof — is permanent, and not an introductory offer used to lure you in.
Credit Limit: This is the amount of money your credit card company is willing to loan you each month. Since you won’t have much of a credit history (if any) when you apply for your first credit card, this number will typically be pretty low, like a few hundred dollars.
No matter what your limit is, though, you don’t want to max it out each month. The lower your credit utilization ratio (the percentage of your available credit that you’re actually using), the better your credit score.
If you think your limit is too low, try calling your credit card company after several months of on-time payments to see if they’ll raise it. But don’t go crazy — a higher limit only makes it easier to run up a balance you can’t pay off.
Minimum Payment: While we recommend paying your credit card balance in full each month, it’s not actually required by the credit card company (because then they wouldn’t get to charge you interest on what you don’t pay off). But they do require a minimum monthly payment, which can be a flat fee or a percentage of your balance that you must pay each month to avoid late fees and your credit score taking a hit. Make sure you pay at least this amount on time each month. Pro tip: Set up auto-pay so you never have to worry about missing a payment.
Secured vs. Unsecured: Getting approved for your first credit card can be a challenge — you need a credit card to build credit but you need credit to get a credit card. See the problem? If you find yourself in this frustrating loop, consider looking into a secured credit card.
These cards require a cash deposit, usually equal to the card’s limit, to be used as collateral if you don’t make your payments. You still treat this like a regular credit card, though, and make your monthly payments on time — the deposit is simply a safety net. After responsibly using your secured card, you can transition to an unsecured card (which doesn’t require a deposit), at which point your deposit will be returned to you.
Other Fees: Besides the annual fee, there are several other fees a provider can charge, so it’s important to read the fine print. One of the most important fees to check out is the late payment fee. If you miss a payment, meaning not even the minimum payment is made, what will you be charged?
Other common fees include foreign transaction fees — whether you’ll be charged extra to use your card when traveling internationally — and balance-transfer fees. People with credit card debt will sometimes transfer their balance to another card (usually with a 0% APR introductory offer) to save on interest while they pay it down. Make sure you know these numbers before you’re hit with unexpected charges.
Rewards: There are a lot of credit cards out there — I mean, a lot — so in an effort to get you to choose one card over another, some providers offer rewards programs. Take stock of the different offerings out there and see which would benefit you the most. For instance, if you love dining out, you may choose a card with a cash-back program on restaurants. Or if you’re always going on trips, one with a travel credit could make more sense. Our guide to credit card rewards breaks down some of the most popular ones.
But don’t choose a card solely on its rewards — make sure all of the terms work for you. The best piece of plastic is the one that fits your financial goals.