WHAT TO DO IF YOU’VE NEVER HAD A CREDIT CARD BUT ARE CONSIDERING ONE?

Credit cards can be very helpful financial tools. For instance, they can help build or repair your credit which can make it easier to get loans at better rates. They provide protection when traveling and against fraud, and enable you to accumulate rewards points or miles.

If you don’t have one, though, you’re not alone. A recent study by Upgraded Points found that 28.5% of Americans don’t have a credit card.

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However, if you decide to get one, there are some pitfalls to be aware of. For instance, it can be easy to accumulate debt with a credit card, and with rates soaring, this can end up costing you a lot if you don’t pay it off right away.

To put this in context, as of April 8, 2024, the average overall interest rate for a credit card in America is 24.66% according to LendingTree. This represents the highest rate since the site began tracking rates monthly in 2019. Therefore, it’s important for a new credit card holder to understand some basic principles of using it.

“A credit card is just a convenience for payment, not a license to spend,” said Sean Fox, president of debt resolution at Achieve. “A credit card is a loan. The credit card issuer will provide a grace period. If you pay back the loan — what you charged — in full by the due date each month, within that grace period, you don’t have to pay interest. If you do not pay in full by that time, substantial interest starts accruing.”

With that in mind, here are some steps to take as a first-time credit card user to ensure you are disciplined and responsible enough to not get yourself into financial trouble.

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Review Your Credit History

Experts suggest that the first step is to find out if you already have a credit history and review your current credit reports.

“Even if you’ve never had a credit card, chances are high that you’ll have a credit report if you’ve ever paid any bill at all,” said Fox, adding that the information that appears on credit reports is used to generate actual credit scores, so it’s important to make sure that base info is correct.

The three major credit reporting agencies — Equifax, Experian and TransUnion — will provide each person a credit report once a week for free at AnnualCreditReport.com. Fox noted that if you find any errors in any of the three reports, you should correct them by following the directions that appear on each agency’s website.

Determine What You Need the Card For

Knowing what you plan on using a credit card for — whether it’s for discretionary expenses or travel, for instance — may help guide you toward the right card for your needs.

Fox said, “Whatever those needs are, know that there are excellent cards available without annual fees, and in general, it’s best to avoid cards with those fees. No-annual-fee cashback cards — where you receive a percentage back of your actual expenditures each month in cash — are usually smart options.”

Get a Secured Credit Card

As Debt.com chairman and CPA Howard Dvorkin explained, there are credit cards specifically designed for people who have little to no credit.

“Don’t apply for them,” he said. “The interest rates are scandalous — up to 30%. That’s understandable, because the card issuers are taking a risk. But you’ll be better off doing something much more modest: Getting a secured credit card.”

According to Dvorkin, a secured credit card is “the most boring way to build credit” — but one of the safest. In essence, you deposit money with your card issuer, and that becomes your credit limit.

“So if you give them $500, your credit limit is $500. Other than that, secured cards work just like traditional credit cards. You’ll get a statement at the end of the month, and if you pay the balance in full and on time, you’ll establish yourself as a good credit risk. It’s like a credit card with training wheels,” he added.

Do Your Research and Scrutinize Fees

Spending time reviewing different credit card options to find the one that fits your spending needs and credit rating is crucial, experts said.

For instance, consumer and money saving expert Andrea Woroch warns that you need to make sure you understand all the various fees that could come with your card beyond the APR, such as late payment or annual fees.

Explore Reward Options

When starting out, credit cards with no annual fees may have limited rewards, but with more credit history and a higher credit score, better rewards can come without annual fees, explained Barbara Quan AFC, manager of financial education at Golden 1 Credit Union.

“For example, if there’s a larger cashback or points boost for everyday essentials like groceries or gas, consider those as purchases to put on the credit card,” she added.

Apply for Just One Card at a Time

Another important piece of advice is to apply for one card at a time, as the credit reporting agencies can view applying for multiple cards around the same time as a possible sign of financial difficulty.

Fox said, “Also, remember that most adults benefit from having a card — one card. Multiple cards are usually unnecessary.”

Develop Responsible Credit Habits To Improve Your Score

Finally, regardless of the type of credit card you obtain, it’s crucial to practice responsible credit habits.

“This includes paying bills on time, keeping credit card balances low relative to the credit limit, and avoiding unnecessary debt. Consistent and timely payments are key to maintaining a positive credit score,” said Taylor Kovar, CFP, founder and CEO of 11 Financial.

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This article originally appeared on GOBankingRates.com: What To Do If You’ve Never Had a Credit Card but Are Considering One?

2024-04-16T17:08:23Z dg43tfdfdgfd