I cannot emphasize enough how important it is to have a good credit history. If you have plans to buy a home or rent an apartment, you will need to have a good credit history. A good credit history takes time to develop, so make sure you plan ahead.
One of the best ways to start developing a good credit history is through a credit card. You can develop a decent credit history in about 6 months by using your credit card to make purchases and paying off the balance in full every month. The longer you have a credit card and consistently pay off your balances in full, the better your credit history will be.
Who is eligible for a credit card?
To apply for a credit card you have to be 21 years of age or older, but you can apply when you’re 18 years old if you have a parent willing to cosign or if you have proof of a steady income. Before applying for a credit card, know that not all credit cards are created equally. Listed below are a few things to consider when choosing a credit card.
Is there an annual fee?
If this is your first credit card you will want to find one that does not charge an annual fee, which is really not that hard to find. Most major credit card companies offer a few options with no annual fees. Cards that do have fees generally have a lot of rewards associated with them, which can outweigh the fee but you typically have to make a lot of charges and always pay it off in full for the fees to be worthwhile.
Credit cards with annual fees typically work best for people who have high earnings and can afford to pay for several thousand dollars or more worth of charges every month.
What is the interest rate?
Credit card companies will charge you interest, also known as APR, on any remaining balance that is not paid off by the due date. These interest rates can be as high as 25%. It may be hard to find interest rates below 20% if this is your first credit card.
That being said, if you pay your balance in full every month you will not be charged interest. Therefore, the interest rate doesn’t even matter. The reason I say to at least look at the interest rate is because who knows what could happen in your life that may render you unable to pay off your balance in full. Since we can’t plan for the unexpected, it’s always a good idea to take a look at the interest rate on the card.
The best approach when using a credit card is to always pay off your balance in full every month. Before you make a major purchase on your credit card, ask yourself if you would be willing and able to pay cash for the purchase right now. If you answered yes, then you can likely afford to charge it to your card. If you answered no, maybe you should reevaluate if you can actually afford this purchase. By sticking to this strategy you should never have to worry about interest rates, ruining your credit, or accumulating credit card debt.
What is the spending limit?
When you apply for a credit card they will offer you a spending limit. As you can probably guess, this is the maximum amount you are allowed to charge to your credit card each month. If this is your first credit card don’t expect to have a crazy high limit. The limit they give you will vary based on your income, credit history, and the credit card company.
When assessing the spending limit try to determine what your expenses are each month and what portion of it you plan to put on your credit card. Then see if the spending limit aligns with your estimated expenses. Again, if this is your first credit card you probably won’t be able to command a large spending limit, so you might not have a lot of choices. That being said, most credit card companies will issue a limit that is beyond what you should spend each month.
My first credit card had a spending limit just under $1,000, which was more than enough at the time. Once you have built a good credit history your spending limit will increase dramatically. Remember, don’t spend what you don’t have. Just because your credit card has a $5,000 limit doesn’t mean you should hit that limit.
What are the rewards?
Most credit cards offer some kind of rewards program where you receive points/credits for every dollar you spend. These points can be used to get all kinds of different consumer products, gift cards, vacations, and cash back. The best option to choose is cash back. Furthermore, you should receive the cash back as a credit towards your balance. This means the cash you are rewarded will go towards paying off your balance.
For your first credit card the rewards program probably won’t be so great. You can expect to get around 1% cash back for all purchases. This means for every $100 you charge and pay off each month you get $1 back. This doesn’t sound like a lot, but it adds up over time. Plus, think about this:
Let’s assume you pay your balance off in full every month, receive 1% cash back for all purchases, and don’t have an annual fee. Now let’s say you charge $1,000 per month to your credit card. At a rate of 1% cash back you will receive $10 cash back every month, which is $120 per year. What I am trying to show is that if you use your credit card responsibly you are literally getting paid to spend money. By using your credit card instead of cash you are saving an extra $120 per year.
Once you have built a good credit history you can get even better rewards programs. For example, American Express offers a card without annual fees that gives 3% cash back on grocery purchases, 2% cash back at gas stations and select department stores, and 1% cash back on all other purchases.
Related reading: How I Made $600 Last Year By Using A Credit Card
In todays world, where a good credit history is needed to rent an apartment or take out a loan, you are eventually going to need a credit card. I hope that I have not only given you the knowledge to choose the credit card that’s right for you, but also the knowledge to spend responsibly.
If you have already forgotten everything you just read in this article, remember this one thing and you will already be on the way to a good credit history: Don’t spend what you don’t have.
Related: 3 Money Management Habits To Avoid