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Opening and using credit cards responsibly is one of the best ways to build a strong credit history. If you don't already have a credit card, here's what you need to know to get your first one.
Before you get your first card, your first step should be to check your credit reports and scores. You'll want to make sure that the information in your credit reports at all three credit bureaus is accurate. With so many different credit card offerings on the market, knowing your credit history and scores will help you apply only for the cards you are most likely to be approved for. Checking your own credit reports does not hurt your credit scores and is a crucial first step to opening up new credit possibilities.
How Do I Get Approved for a Credit Card?
When you apply for a new credit card, the issuing bank will typically use your credit history and scores to determine whether you should be approved and what APR you should pay. Depending on the type of card you apply for, card issuers may only approve people in a certain score range and issue higher APRs to people they deem less creditworthy.
Knowing your scores before applying for a credit card can give you an idea of which cards you may qualify for. It can also save you from racking up hard inquiries, which occur whenever someone else checks your credit. A hard inquiry, which can affect your credit scores, remains on your credit reports for up to two years.
In most cases, people applying for their first credit card will have little or no credit history. But if you have at least some credit history, knowing what's in your credit reports before you apply can help you maximize the potential benefits by selecting the right card. People with good credit scores may also be given lower APRs, which can help save money on interest payments over time.
If you have little or no credit history, using a credit card is one of the best ways to establish or build your score. While you may not be approved for a normal or premium card, there are plenty of options like secured credit cards that can serve as stepping stones to other types of credit.
Beyond your credit reports and scores, card issuers may take into account other factors when considering you for new credit. Credit card applications will often ask for your income, assets, age, and other general information like Social Security number and contact information.
Establishing Credit with a Secured Card
Credit cards are one of the best ways to establish and build your credit. But for people applying for their first card with little or no credit history, secured credit cards are a good option to help you establish your credit history.
Secured credit cards can be used like any other credit card, but they require a security deposit upon signing up. The deposit amount can range from $200 to $3,000 and will typically be used to set your credit limit.
Once you start to use your secured card, most card issuers will report your account, your credit limit, and your payment history to at least one of the three major credit bureaus: TransUnion, Equifax, and Experian, the publisher of this article. This information becomes part of your credit report and is used to calculate your credit scores. However, you will want to confirm that the issuer of the secured card will report your history to the credit bureaus in order for the card to help you build credit.
It is important not to miss or make late payments, as your payment history accounts for 35% of your FICO® Score*, one of the most commonly used credit scores. You should also try to keep your credit utilization ratio—the amount of credit you use each month compared with the total amount of credit you have available to you—as low as possible.
Depending on the secured card you get, there is a chance it will automatically convert into an unsecured card after several months of responsible use. With the Discover it® Secured card, your account is automatically reviewed every eight months to see if it can be converted into an unsecured card. Check out these other Experian secured card partners to find the right secured credit card for you.
Choosing a Retail Card for Your First Credit Card
Another option for your first credit card is to apply for a retail or store card issued by a major retailer. These types of credit cards, which may offer some rewards, are meant to be used primarily at the stores that issue them, though sometimes they can also be used elsewhere.
Retailers offer these cards as a way to encourage consumers to buy their products and spend money at their stores. As a result, retail cards generally have less stringent credit requirements for approval, making them an option for consumers with little or no credit history.
While most retail cards can only be used to make purchases at specific stores, most of the cards are backed by a major card issuer and your payment history and balances are reported to one of the three major credit bureaus.
Retail credit cards can come with certain pitfalls, however. They generally carry much higher interest rates than other cards, so you will want to be mindful of not carrying a balance. Retail cards also typically come with lower credit limits, so it's important to pay attention to your credit utilization ratio. Utilization is one of the most important factors in calculating your credit score—accounting for 30% of your FICO® Score—and it is recommended to keep your total ratio below 30% of your total combined credit limits (and below 10% for the best scores).
Applying for a Student Card as Your First Credit Card
Student credit cards are designed for students and can be a good option for young people with little or no credit history. These cards can help students establish a credit history and build credit scores while learning how to responsibly manage their finances.
There are many different types of student cards available. Some offer perks like cashback and cash bonuses for students with good grades. The Discover it® Student Cash Back Card, an Experian partner, offers a $20 statement credit each year to students who maintain GPA of 3.0 or higher. It also offers 1% cashback on all purchases.
Student cards are generally backed by major credit card issuers, and your payment and account information is typically reported to one or more of the three major credit bureaus.
Become an Authorized User
A primary credit card owner can add an authorized user to his or her account. Authorized users are allowed to make purchases with an account, but they cannot make changes to the account, nor are they held responsible for making payments.
Being an authorized user can be a good way to establish or rebuild credit because in most cases, the account activity is reported on both the primary cardholder's credit reports and the authorized user's credit reports (though you should always ask the issuer to confirm). It is also the only way someone under the age of 18 can get a credit card.
Once listed as an authorized user on an account, you can make purchases with the card. It's important to establish guidelines with the primary cardholder about how much you can spend. Remember, if the primary cardholder does not make payments on time or if either of you use too much credit, that can drag down the credit scores of both the primary holder and authorized user.
Using Your Credit Cards Responsibly
No matter what type of first credit card you get, it is important to use it responsibly in order to build a strong credit history and stay out of debt. Follow these tips to ensure your credit card usage helps your credit history and scores in the long run"
- Pay your bills on time each month, as payment history is one of the most important factors in calculating your credit score. Consider setting up automatic payments so you're never late.
- Keep your credit utilization ratio or the amount of credit you use compared with the amount of credit you have available to you, below 30%. Utilization is based only on your revolving credit lines—like credit cards—and is the second most important factor in calculating your credit score.
- Take advantage of all the rewards and benefits your card offers to maximize the card's value.
- Practice responsible spending and don't spend more than you can afford to pay off at the end of every month. Using a budget is a helpful way to make sure you don't overextend yourself while using credit.
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This service is completely free and can boost your credit score fast by using your own positive payment history. It can also help those with poor or limited credit situations. Other services such as credit repair may cost you up to thousands and only help remove inaccuracies from your credit report.
Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.
This article was originally published on December 11, 2018, and has been updated.
*Credit score calculated based on FICO® Score 8 model. Your lender or insurer may use a different FICO® Score than FICO® Score 8, or another type of credit score altogether. Learn more.