For years, you’ve watched your parents, siblings and friends use credit cards to pay for dinner, shopping and entertainment. And now you’re ready to take a big step on the road to financial independence: opening your first, very own credit card. You’ll be establishing a credit history, and the card’s perks are going to come directly to you—but so are the bills. Choose your card wisely.
Fortunately, when it comes to credit cards, choice is the operative word. With so many kinds of cards available—into the thousands—you can pick one that’s exactly the right fit for you. Cards differ on annual fees, interest rates and, crucially, rewards. But if you take the time to assess how you might use a credit card and what you want out of it, you can find the features that best fit your specific needs. Here’s what to look for as you review your options.
What You Need to Know About Credit Cards
Let’s walk through some of the basics, then we’ll dive more deeply into some of the most important questions surrounding this significant moment in your financial life.
● Convenience: You’ll find it is a lot easier to walk around with a small piece of plastic (or the credit card information in your smartphone) than with a thick wad of cash. Similarly, it can make a lot more sense to use a credit card instead of cash for your most expensive purchases. Plus, credit cards are handy when speed is of the essence for your purchase, and there’s no time to easily find a bank or ATM.
● Security: Lose that cash or have it stolen, and it’s gone. But if your credit card falls into the wrong hands, you can call the credit card company and probably avoid being charged for purchases you didn’t make. It’s a world of difference.
● Costs: Credit cards can have costs and fees, but not always. Cash-back cards, for instance, will often have no annual fee. Cards with other kinds of rewards may require an annual payment, and the size of that fee will vary depending on the terms of the card. Generally speaking, the more valuable the card’s perks, the higher you can expect the annual fee to be.
● Payments: With the vast majority of cards, if you are late in paying your bill, you will owe a late fee. Being tardy could also hurt your credit score and cause your annual interest rate to rise. Keep in mind that with credit cards, interest rates can be double, even triple that of, say, a student loan. Having to pay interest can diminish or even wipe out the value of the rewards that attracted you to the card in the first place.
● Rewards: Credit cards may enable you, directly or indirectly, to lower the cost of a purchased item. Cash-back cards, in effect, give you a rebate on something you were hopefully going to buy anyway. Other cards may offer you a benefit at a specific retailer, airline frequent flyer miles or points you can then apply to other goods and services. Keep in mind that credit card points can expire.
● Credit History: If you can demonstrate that you can handle a credit card, your credit score will rise, and that will increase your chances of qualifying for bigger loans down the line, at interest rates you can afford. Lenders want to be confident that you will responsibly repay your loans, and will check your credit rating before lending you money for a home mortgage or an auto loan, or selling you an insurance policy. Meanwhile, the better your credit score, the more you can grow your credit line over time. Note: If you don’t spend up to your credit limit, that higher credit line offers that much more of a cushion in an emergency.
No Credit Yet? Consider Starting with a Secured Card
If you can’t qualify for a classic no-deposit credit card, consider a “secured” version, instead. Secured credit cards require a security deposit upfront covering all or some of the money you intend to spend. Unlike with a debit card, which operates similarly, your ability to successfully handle a secured credit card is reported to credit bureaus and considered a formal demonstration of financial responsibility.
It is possible to qualify for a secured credit card with no credit history at all, as some issuers will look at other examples of financial accountability, such as bank and income statements and bill payments. Play your secured credit card right, and you can graduate to a no-deposit version.
What Are the Best Introductory Credit Card Offers?
Now that you’re ready to pursue a credit card, the fun starts. Many credit cards have enticing introductory offers, but be careful to read the fine print.
For example, a credit card affiliated with an airline might reward you for signing up with a large one-time grant of frequent flyer miles, enough for one or more “free” round-trip flights. Other cards may offer big cash-back rewards as a signing bonus. The award, however, may be dependent on your spending a certain amount of money on the card within a short period of time—usually a few months. That might work for you if you are planning a big purchase or have a large budget, but make sure you’ll qualify for the bonus because it isn’t a given.
Remember, you don’t want to force your spending, or it will negate the whole point of a rewards card. And keep in mind that when the benefits of the introductory offer have faded, you don’t want to pay an annual fee that exceeds the value of the rewards you receive.
Rewards, Part I: When Should I Choose Cash Back?
The majority of reward credit cards are cash-back cards. The cash rewards come in three different varieties:
● Flat rate: A flat-rate credit card will offer you a certain percentage of any purchase back in cash, typically 1%–2%. So if you spend $100, you get $1–$2 back.
● Accelerated: These credit cards offer higher percentages of cash back for spending in certain categories. So while such a card may give you only 1% back for groceries, it may give you 5% back when you fill up your car with gasoline.
● Rotating: Rotating cards act similarly to an accelerated rewards card, but the qualifying categories for the higher-percentage rewards change from time to time. You’ll have to keep up with the category changes and often have to proactively opt in to qualify for the higher level of cash reward.
It’s hard to argue against a cash-back card, assuming you pay your bill on time. After all, you get a small portion of your payment back just for using your credit card.
The trick, if you choose this path, is to find the card that makes the most sense with your spending patterns so as to maximize your rewards. If, say, you have a big family and spend a lot on groceries, focus on a card that rewards grocery purchases (sometimes at a specific retailer) at a higher rate. If you drive a car with lower gas mileage and find yourself filling up a ton, then a card that features 5% back on gasoline makes a lot of sense.
Rewards, Part II: When Should I Choose Points or Miles?
Many people prefer to take their rewards via points or frequent flyer miles for each dollar spent. (The two are not necessarily mutually exclusive, as you can use points for airline tickets and hotel stays as well.)
● Points: Of the non-cash reward options, points can be the most flexible in terms of how they are then subsequently spent. They can be used not just for items such as flights or hotels, but also for non-travel-related items, such as gift cards or charitable donations.
● Frequent Flyer Miles: If traveling is something you do often, a credit card with rewards in miles (or points that are de facto miles) may be the way to go. Using them in turn to pay for a specific flight can be a seamless experience. Pick the airline you travel with most, and remember that each airline might offer multiple cards with varying fees and rewards.
The good news is that many major brands and companies have their own credit cards, usually with benefits that reward you for buying their goods and services. (But you can use most branded credit cards for everyday purchases and still see brand benefits.) The rate at which non-cash rewards are earned can be variable and depend on the specific purchase and the vendor. So you may receive 6% in points on a purchase with the issuer of your card but 1% on purchases elsewhere, for example. So if you shop almost exclusively at one retailer, consider a card sponsored by that store.
Andy Sobel is a freelance writer and editor. He has held senior editing positions in The Wall Street Journal’s New York and Brussels newsrooms and was managing editor of American Banker. A graduate of the University of Missouri and Union College, he now lives in Nashville, TN.
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