Credit Cards
March 1, 2023
Why Get a Credit Card?
A credit card is one of the best ways to build a strong credit history, which is especially helpful when applying for a loan or mortgage. There are many other benefits to using a credit card, such as simplifying payments, financing purchases, accumulating rewards, and fraud protection.
- Simplify payments – build your credit and easily keep track of your payments by putting monthly bills on your card and paying in full each month
- Finance purchases – pay for a purchase in full when your credit card bill arrives rather than paying cash up front
- Accumulate rewards – many credit cards offer rewards such as cash back, hotel and airline points, and more
- Fraud protection – credit cards offer better fraud protection than cash and debit cards if your card or information is stolen
What to Know Before Getting Your First Credit Card
Getting your first credit card can be exciting, but there are a few things to keep in mind as you use it. When used properly, you can build your credit and maintain a solid credit history. The following is a list of items to think through as you explore which credit card will work best for you.
- The credit cards with the best rewards are typically for those with good or excellent credit scores. This is one of the many reasons to build and maintain a good credit score
- A secured card can help you build a solid credit foundation. This type of card requires that you also open a savings account as a security for your credit card account – typically with a minimum security deposit around $300
- Your first credit card can build your credit, but it can also ruin it if you do not handle it responsibly
- You should carefully review the rates and fees before applying
- If you pay your credit card balance in full every month, you will never have to worry about interest. Naturally, this means you should aim to pay more than the minimum each month
- If you happen to be rejected for a credit card, the card company is required by federal law to tell you why in the form of an adverse action notice. Possible reasons could include insufficient income, a lack of credit history, and too low of a credit score, to mention a few
When is a Good Time to Get a Credit Card?
You should only apply for a credit card when you have enough income to cover the average amount you plan to charge on the card each month. If you do not, it will be easier to fall in the trap of making the minimum payment each month. A credit card can be an effective tool for building credit, especially for young adults who have yet to establish a credit history. For those who have proven to themselves that they can and will continue to properly manage a card, another good time to open a new one is to earn rewards that are not offered with your current card, such as an introductory bonus, cash back, airline miles, etc. Another possible reason for opening a new card is if you are planning a vacation and you do not currently have a card that offers travel insurance for trip delays, cancellations, lost luggage, and the other things that can go wrong when traveling.
When is a Bad Time to Get a Credit Card?
It is never a good idea to get a credit card if you do not have the income or financial resources needed to pay off the charges in full every month. This can play out in a few different ways. If you have sufficient income but spend more than you can afford each month, then a credit card will only make it easier to continue spending above your means. It is also not a good idea to apply for a card if you are currently unemployed. There is a greater chance your application will be rejected when you are unemployed, as the card company will see you have limited funds available to pay on time each month. Preparing to make a large purchase, such as a home or car, is one reason that often gets overlooked, but it is crucial to hold off on applying for a credit card while you are going through one of these processes. You do not want your credit to be negatively impacted in any way while trying to make a large purchase.
Calculating Your Credit Utilization Ratio
Every individual with a credit card should seek to understand credit utilization ratio. This is how much you owe on all your revolving accounts, typically credit cards, in comparison to the total amount of credit available to you. The ratio can be found by adding up the balance on all credit cards, adding up the credit limits on all your cards, dividing the total balance by the total credit limit, and multiplying by 100. For example, if you have two credit cards, each with limits of $1,000, and you currently owe $300 on each, your credit utilization ratio would be 30 percent. It is best practice to calculate the ratio on all your credit cards individually, as well as combined. Most credit reporting agencies suggest you keep your credit utilization ratio below 30 percent, as charging too much on cards is associated with a higher credit risk. If you remain below the 30 percent threshold on all your cards individually, then the overall ratio will always be in a safe zone.
Conclusion
Opening a credit card is a big decision that should not be taken lightly, especially for those seeking to establish credit for the first time. It can be a great way to build your credit, but it can also hurt your credit if you spend more than you can afford to pay back each month. Take the time to research thoroughly and honestly evaluate your current financial situation before committing to a credit card.