Credit cards are more than just a way to buy things and pay for them later. The way you handle a credit card impacts your entire financial future. Making mistakes, even with your first credit card, can affect you for years. So, before you get your very first credit card, here are some important things to know.
You need to be at least age 21 with your own income or have a cosigner.
Age 18 is the minimum legal age to get a credit card in the United States. However, if you’re under age 21, credit card issuers are required to get proof of your income before approving your credit card application.
If you don’t have your own income, you’ll have to apply for a credit card with a cosigner to get approved. The cosigner who applies with you must be over 21 with their own income.
You have a credit card payment due each month.
Your credit card issuer allows you to borrow money using your credit card. You’ll have to pay back what you borrow by making a payment each month until your balance is completely repaid. Your credit card billing statement, which is sent to you each month, includes your due date, the payment amount due, and instructions for making your payment.
Your credit card payments will be due on the same date each month. For example, if your payment is due on July 16th, your payments are due on the 16th of each month.
By law, the credit card issuer has to accept your payment as on time as long as you make it by 5 p.m. on the due date. Some credit card issuers extend the cutoff time to later in the evening, or even as late as midnight. It’s best to make your payment by 5 p.m. unless you’re sure your credit card issuer will accept a later payment.
There’s a penalty for missing your due date.
If your credit card payment is late, even just a few minutes late, you’ll be charged a late fee. The first time your payment is late, you’re charged a late fee up to $27. If your payment is late a second time in a six-month timeframe, your credit card issuer can charge up to $38 late fee.
Your credit card issuer is also allowed to raise your interest rate to the penalty rate if your account becomes 60 days past due. That is, if you miss two payments in a row. The penalty rate is the highest interest rate charged on a credit card.
You’ll be charged interest – unless you pay your full balance.
Interest is the cost you pay for carrying a balance on a credit card. You do have a grace period during which you can pay your full balance and avoid paying interest on your balance. For the grace period to apply, you must have started the billing cycle with a zero balance.
Note that cash advance transactions (which you should avoid because they’re more expensive) generally do not have a grace period. This means you’ll start paying interest on these transactions right away.
Interest is charged in the form of a finance charge. The finance charge is calculated based on your interest rate (the APR) and your balance. Many credit card issuers use the average daily balance method to calculate finance charges. This method takes the average of your balance each day of the billing cycle and applies an adjusted version of your APR.
You should always read your credit card statement.
Each month, your credit card issuer will mail a billing statement to you. Or, if you’ve signed up for paperless billing, you can check your online account for your most recent billing statement. The billing statement will include all the transactions that happened on your account during the past billing cycle. Never skip a month of reading your billing statement, no matter how accurate it seems.
The most important details – your current balance, minimum payment, and due date – appear at the top of your billing cycle. Several other important details are also listed in your credit card statement.
Read through the list of transactions to be sure:
- Your last payment was applied
- Any other credits or refunds were applied correctly
- All the purchases are accurate
- There are no duplicate transactions
You can dispute any billing errors directly with your credit card issuer by writing a letter describing the error. You have 60 days from the date your billing statement was mailed to you to make your dispute. Your credit card issuer will investigate and correct your account based on the results of the investigation.
Signing up for an online account can make it easier to make your payment, manage your account, and detect any fraud or unauthorized accounts.
You can charge up to your credit limit (and sometimes a little more), but you shouldn’t.
The credit limit on a credit card is the maximum amount you can charge on your card without receiving a penalty. Many credit card issuers have gotten rid of the fee for going over your credit limit, but you could still trigger the penalty rate. This is a higher interest rate charged on your credit card balance when you default on your credit card terms.
Maxing out your credit card, another way of saying you’ve charged up to your credit limit, can also damage your credit score and keep you in debt. It’s best to charge only a small amount on your credit card, then pay it in full each month. The more you charge, the harder it will be to pay your balance in full each month.
You can pay the minimum, but you should pay more than that.
Your credit card issuer doesn’t require you to pay off your full balance each month. It sounds like they’re doing you a favor, but they’re not.
The minimum payment is only a small percentage, 1% to 3% of your credit card balance. On a credit card balance of $1,000, your minimum payment would only be between $10 and $30. This makes your credit card payment much more affordable. Paying the only the minimum gives you more freedom to spend your income somewhere else – at least in the short-term.
While the minimum is easier to pay, it’s much better to pay more than the minimum. When you pay the minimum, it takes you much longer to pay off your credit card balance.
For example, if you have a $1,000 credit card balance with a 16% interest rate, it would take 9 years to pay off your credit card balance. Can you imagine it taking 9 years to pay off a $1,000 sofa, television, or smartphone?
Making only the minimum payment is expensive. It’s not expensive month by month, but over the 9 years it takes to pay off the credit card balance in the example above, you’ll end up paying almost $800 in interest. In total, you’ll end up paying $1,792.87.
You won’t be able to use a maxed out credit card again until you free up some available credit. With minimum payments, that can take several months, possibly even years.
You should ideally pay off your full balance each month. Or, pay as much as you can to pay off your balance sooner and reduce the amount of interest you pay.
How you use your credit card affects your credit score.
Your credit score is a three-digit number that many creditors and lenders use to approve your applications and set your pricing. Your credit card is one of the things that will influence your credit score.
Credit scores are calculated based on information in your credit report – a record of your credit, loan, and other debt accounts. Once you’re approved for a credit card, it will be included in your credit report and will affect your credit score.
Your credit report will several details about how you’ve used your credit card including:
- the name of your creditor
- the date you opened the credit card
- the status of your account (open, closed, past due)
- your credit limit
- your current balance
- whether your payments have been on time
Any mistakes you make with your credit card can potentially go on your credit report. Once negative information is on your credit report, it can affect your credit score and make it harder to get future applications approved. Late payments or high credit card balances, for example, can make it harder to get approved for a mortgage, auto loan, or even another credit card.
The best thing you can do for your credit score is keep a low credit card balance and make your payments on time each month.
Credit cards come with several fees.
Credit card fees increase the cost of having a credit card. Many credit card fees can be avoided depending on how you use your credit card. The goal is to minimize the amount of fees you pay on your credit card. Here are come common credit card fees to know about:
The annual fee is a yearly fee charged for the credit card. Rewards credit cards often come with an annual fee. Some credit cards generously waive the annual fee in the first year and begin charging the fee starting on the card’s first anniversary.
You’ll be charged a late fee if your credit card payment isn’t made by the due date or if your payment is less than the minimum due.
Balance transfer fee
The balance transfer fee is charged on balances that you move from another credit card. You can be charged a balance transfer fee even if you have a promotional interest rate on your balance transfer.
Cash advance fee
You’ll be charged a cash advance fee if you use your credit card to withdraw cash from an ATM or make a cash equivalent transaction.
When you carry a balance on your credit card, you’re charged interest in the form of a finance charge. The finance charge is a calculated based on your outstanding credit card balance and your interest rate, or APR.
Foreign transaction fee
Purchases made in currencies other than U.S. dollars may be charged a foreign transaction fee. Some travel credit cards waive the foreign transaction fee.
If your bank returns your credit card payment, for example because you didn’t have enough funds to cover the payment or your account was closed, your credit card issuer will charge a returned payment fee.
Knowing your credit card fees allows you to use your credit card in a way that allows you to avoid many fees. You can learn the fees for your credit card by reading the credit card agreement.
Your first credit limit may not be very high, even if you make a lot of money.
Credit card issuers set credit limits based on your income, your existing debt, and your credit history. Because your credit limit is based on more than your income, your first credit card may have a low limit.
As you use your credit card responsibly and pay on time, your credit card issuer will probably raise your credit limit. If your creditor doesn’t raise you credit limit automatically, you can request a credit limit increase.
Other credit mistakes can keep you from getting a credit card.
Getting your first credit card can be tough. Credit card issuers consider your previous credit history when they decide whether to approve your credit card application.
Other credit mistakes can also keep you from getting approved for a credit card. For example, bounced checks that you haven’t paid, student loan default, late payments on other loans, or debt collection accounts can make it harder to get your first credit card.
If you’re having trouble getting approved for your first credit card, consider applying for a secured credit card. This type of credit card is often easier to get because you pay a deposit to secure the credit limit. The deposit is refundable as long as you don’t default on your credit card payments.