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What You Should Know Before Applying for Your First Credit Card

When you decide to apply for your first credit card and choose what you believe is the best one for you (there are plenty to choose from), it’s time to fill out the application. Applying for your first credit card can be exciting, but it can also be a bit intimidating. Knowing what to expect can alleviate some of your anxiety.

What is a credit card and do you need one?

A credit card looks just like a debit card, but instead of directly withdrawing money from your bank account, you’re essentially taking out a short-term loan from the card-issuing bank. You may need to pay interest unless you pay off the card every month. It’s hard to say that anyone truly needs a credit card, although it can be a great resource in emergencies.

Credit card rewards programs

When you earn credit card points or cashback rewards, you may wonder where the money comes from and whether you’re actually paying for the “free gifts” through some kind of fee.

Secured vs. unsecured credit cards

A credit card is a type of loan that you can borrow against repeatedly as long as you pay it back. Despite what you may have been thinking until now, a credit card is not free money. When you take on the responsibility of owning a credit card, remember that you need to pay back everything you borrow. This type of credit card is known as an unsecured card because the loan granted to you is not secured by any type of collateral.

EMV security and your personal information

Credit card companies collect a good amount of personal and confidential information to process your card application. For example, most applications ask for your tax ID number and other personal information, like your date of birth. This allows the credit card issuer to confirm your identity and check your creditworthiness with credit agencies – which also identify you by your social security number.

Using a physical address

The address you provide in your application is where the actual credit card and financial statements will be sent. Make sure to use a current and accurate address. Note that if you use a P.O. Box for your address, your application processing may be delayed because the credit card issuer requires a physical address for you.

Your income

The credit card issuer is required to request income information to ensure that applicants have the ability to repay what they borrow. If you do not have sufficient income, you may need to wait until you get a job, or ask your parents or another adult to co-sign for you. Your parents’ income does not count for a student credit card unless you are on the account with them and have access to their regular deposits.

The decision

Once you select the right credit card for you, many online and phone applications can be processed in seconds, giving you almost instant approval. Sometimes, approval may take longer because it requires human interaction with you, either to get more information from you or to manually review your application. Do not assume that you have been rejected just because you did not receive an immediate answer.

Low credit limit

When you first start using credit, credit card issuers often begin by giving you a small credit limit to reduce their risk. This is not a bad thing; you need time to get used to managing a credit card, and a high credit limit makes it far too easy to fall into debt. Additionally, credit limits are often tied to income, so if you are working part-time while attending college, your credit limit may be restricted by your earnings.

Account

Minimum Payment

Credit card companies send a bill each month requesting the minimum payment on your account. This amount is the least you can pay to keep your account current and maintain your credit score. There are two main ways companies calculate the minimum amount due for you: Method 1: Percentage-based

The bank that issued your card bases the minimum payment on a percentage of your card balance. The percentage ranges from 1% to 3%, so a balance of $1,000 will require a minimum payment of $30. Method 2: Percentage plus interest and fees

If you pay without paying off the card, you will also pay interest, such as 18%. This amount is an annual rate, so you need to divide it by 12 months to get your monthly interest rate.

So, to find the 18% interest rate on a $1,000 credit card bill, you need to divide 18% by 12, which equals 0.015 (0.18 / 12 = 0.015). Now, multiply $1,000 by 0.015 to reach the monthly interest cost of $15 ($1,000 * 0.015 = $15). Also, if you pay after the due date, you may incur a late fee of $35.

To sum things up, a 3% payment of $30
Interest cost of $15.00
Late fee of $35

This means you’ll pay $30 + $15 + $35 = $80 for the monthly payment. Unfortunately, the only part of your payment that actually reduces your principal card balance is the $30, even though you paid $80. That’s why it’s important to make payments larger than the minimum amount; otherwise, you’ll mostly be paying interest and fees.

Your Credit History

Credit card companies report your monthly credit card usage to companies known as credit bureaus or credit reporting agencies. These bureaus maintain a credit record for everyone who has a credit card, loan, or other types of credit-based accounts. Some credit card-related mistakes—such as late payments and high balances—will appear on your credit report and make it harder to obtain other credit cards in the future.

Your Credit Utilization Rate

When you get your credit score, known as your FICO score, it is calculated largely based on the amount of credit you have available and how you use it. If you have two different credit cards with a total of $3,500 in available credit, it’s important to use only about 30% of that amount.

This means you could charge up to $1,050 on both cards combined before it starts to impact your credit score. If you use more than 30% of your total available credit combined, your credit score will drop because you’ve become a greater risk regarding repaying your card balances.

Source: https://www.thebalancemoney.com/what-to-know-before-you-apply-for-your-first-credit-card-960011


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