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Getting your first credit card can be a great way to establish a good credit score, enjoy improved security and convenience and even earn rewards on your everyday spending.
Here's everything you need to know about how credit cards work, how to apply and what to do to ensure responsible use.
What Is a Credit Card?
A credit card is a type of credit account that provides the user with a revolving line of credit. You can borrow up to your credit limit, pay it off and borrow it again repeatedly.
Credit cards are typically used in point-of-sale—say, at the grocery store or a clothing shop—and online transactions. However, you can also use credit cards to get cash via a cash advance or transfer other debts to your card with a balance transfer.
Credit cards are issued and serviced by banks, credit unions and other financial institutions and typically run on one of four payment networks: American Express, Discover, Mastercard or Visa. The payment network acts as a middleman between the merchant and the card issuer, which approves or declines each transaction.
Credit cards typically have variable interest rates, with an average rate of 16.65% as of May 2022, according to data from the Federal Reserve. Each month, you'll receive a statement from your credit card issuer that tells you the balance you'll have to pay by your due date.
The time between the statement date and the due date, which typically lasts at least 21 days, is your grace period. During this time, you can pay your balance in full without incurring interest. If you carry a balance from month to month, however, you'll be charged interest on the unpaid balance.
Additionally, you can lose your grace period for the following month if you don't pay your balance in full.
Over time, you can use a credit card to build credit by paying on time every month and keeping your credit utilization ratio—essentially your balance relative to your credit limit—low.
Understand These Important Credit Card Terms
Before you get started with your new card, it's important to understand the jargon that comes with the account. Here are some of the more common credit card terms and their definitions:
- Annual fee: Some credit cards charge an annual fee for the privilege of using the card. This fee is common among rewards credit cards that offer additional perks and certain credit cards for people with bad credit.
- APR: The annual percentage rate (APR) on your card is the interest rate it charges if you carry a balance from one month to the next. Credit card APRs are typically variable, which means they fluctuate over time.
- Autopay: You can set up automatic payments from your bank account to avoid missing your due date. Credit card issuers typically allow you to choose how much to pay every month—the full statement balance, the minimum payment or a flat amount.
- Balance transfer: The feature allows you to transfer a balance from one card to another. It can be helpful if you're struggling with a high-interest balance and can enjoy a lower rate or even a 0% introductory APR promotion on another card.
- Billing cycle: The time period between two statement dates. Billing cycles typically last a month, and the balance at the end of each one is typically what's due for that period.
- Cash advance: Most credit cards allow you to access cash using your credit line. That said, cash advances typically come with an upfront fee and a higher interest rate. Additionally, they don't qualify for a grace period.
- Credit limit: The total amount you're allowed to charge to your credit card. If you try to exceed your limit, the card issuer will typically decline the transaction. Credit limits are determined by your credit history, income and other factors.
- Credit utilization ratio: The percentage of your credit limit that you're using at a given time. A low utilization ratio, or rate, typically correlates with a higher credit score.
- Grace period: The period between your statement date and your due date, during which you can pay off your balance without interest charges. Credit card issuers aren't required to offer one, but most do.
- Introductory APR: Some credit cards offer a low or even introductory 0% APR on purchases, balance transfers or both for a set period, which can range from six to 21 months in most cases.
- Late payment fee: If you miss your due date, your card issuer may charge a late fee, which can vary from card to card.
- Minimum payment: The minimum amount that's due every month on your account. Credit card issuers typically have different ways to calculate minimum payments, but it's generally a small fraction of your total balance.
- Penalty APR: If you miss a payment, your card issuer may assess a penalty APR, which is higher than your regular APR. This higher rate may remain in effect for at least six months.
- Rewards: Many credit cards offer rewards in the form of cash back, points or miles. You can earn rewards in the form of a sign-up bonus or on your everyday spending.
- Statement balance: The amount due at the end of each billing cycle.
What Are the Best Credit Cards for Beginners?
There's no single credit card out there that's best for everyone, but there are some credit cards that tend to be a better fit if you've never had one and your credit history is somewhat limited or nonexistent.
For many people, a secured credit card may be a good option. These cards function similarly to traditional credit cards but require an upfront security deposit—usually equal to your credit limit―to approve your application. You can typically get the deposit back after several months of on-time payments or after you've closed the account.
That said, there are some starter credit cards that don't require a security deposit. If you're considering an unsecured credit card for beginners, shop around and compare annual fees, APRs and other features to find the right fit for you.
How to Compare Credit Cards
There are thousands of different credit cards available in the U.S., and many of them have unique features that can make them a better fit for you than others.
As a result, it's essential that you avoid applying for the first credit card offer you see, even if it looks good. Depending on what you're looking for in a credit card, you can run a quick internet search and find some of the best options available based on your preferences. You could also explore many offers in one place with Experian CreditMatch™, which shows you personalized credit card offers instantly.
Here are some different factors to consider when comparing credit cards:
- Credit score: There are credit cards available for consumers across the credit spectrum, but many are specifically designed for certain credit score ranges. Make sure you're comparing cards where you have a good chance of approval.
- Rewards: If you're considering rewards credit cards, look at the rewards rate or rates—some cards offer a flat rate on everything, while others may offer tiered rewards based on spending categories or even rewards categories that rotate every few months. You'll also want to compare sign-up bonuses and what it takes to earn them.
- Card benefits: Think about what other perks you want with your credit card. If it's a 0% intro APR promotion, compare promotion lengths. If it's travel benefits, compare how valuable the perks are, how usable they are and whether they fit your travel habits.
- Annual fees: Not all credit cards charge annual fees, but among those that do, you'll want to compare how much each card costs and what benefits it provides that can make up for some or all of the yearly fee.
- Interest rates: If you plan on paying your balance in full every month, a credit card's APR doesn't matter much. But if you think you might need to, a lower APR can outweigh many other features a card can provide.
- Acceptance: Most credit cards can be used just about anywhere in the U.S., but if you travel internationally, cards that run on the Visa and Mastercard networks are typically best. Also, some store credit cards are "closed loop," which means you can only use them at that store. If you want more flexibility, consider a card that doesn't have that restriction.
How Do Credit Card Rewards Work?
As previously mentioned, credit card rewards can come in the form of cash back, points or miles.
- Cash back: You'll typically get cash back in the form of a percentage. For example, if you have a cash back credit card that offers 2% back, you'll receive $2 in rewards for every $100 you spend on the card. Common redemption options include a deposit to your bank account, a statement credit, a paper check, gift cards and more.
- Points: You'll receive a set number of points on each purchase. Depending on the card, you may be able to use your points to get cash back and statement credits, buy gift cards, book travel and more. Many points credit cards are travel cards, but that's not always the case.
- Miles: Typically offered by travel credit cards, you'll get a set number of miles on each purchase. You can either use them to book flights with specific airlines or, if you have a general travel card, book all sorts of travel.
If a card offers tiered rewards, you'll receive varying rewards rates depending on your spending category. For example, a card may offer 4% back at grocery stores and 3% back on gas but only 1% back on everything else.
Also, a few cash back cards offer rotating categories, which change every few months. You'll typically earn a higher rewards rate on these categories with a cap on how much you can earn.
How to Apply for a Credit Card
The best way to apply for a credit card is typically online, but you may also be able to in person at a local bank or credit union branch or over the phone.
If you're applying online, here are the steps you'll take:
- Visit the credit card issuer's website and review the card's features and terms.
- Click on the "Apply" button to start the application process.
- Fill out the application, which typically requires your name, address, contact information, Social Security number, date of birth, income and employment status, and your housing status and monthly payment.
- Read the terms and conditions of the card, including its interest rates, fees and other fine print.
- Submit your application.
The underwriting process typically only takes a few seconds, and you should receive a response shortly after your submission. There are three possible responses:
- Approval: If you've been approved, you'll receive the card within seven to 10 business days in most cases.
- Decline: If you've been declined, you'll receive an adverse action notice detailing the reason for the denial and your rights as a consumer.
- Pending: In some cases, the card issuer may want more information to complete the application or may refer it to a credit analyst for human review. You should receive a letter asking for certain documentation or a letter with the final decision.
Tips to Responsibly Use a Credit Card
Credit cards can provide a lot of value, whether it's through helping build a positive credit history, the added security they provide or the rewards and benefits you can get.
But if you don't use your credit card responsibly, you can easily rack up a lot of high-interest debt, which can cause more harm than good. Here are some tips to help you use your new credit card wisely:
- Read the card agreement carefully to understand your account terms.
- Create a budget to avoid spending more than you can afford to pay off every month.
- Plan to pay your balance on time and in full each billing cycle.
- Keep your balance low relative to your credit limit to maintain a low utilization rate—some experts recommend 30%, but there's no hard-and-fast rule. The lower, the better.
- Check your online account and monthly statements to ensure that all of the transactions are accurate.
- Avoid overspending for the sake of rewards.
As you use your card responsibly, you'll be able to enjoy all the benefits it has to offer without most, or even all, of the potential pitfalls.
Monitor Your Credit to Track Your Progress
As you work to build your credit with a new credit card, it's important to monitor your credit so you can track your progress and see how certain actions impact your credit score.
Experian's credit monitoring service is free and offers access to your FICO® Score☉ and Experian credit report. Additionally, you'll get real-time alerts when changes are made to your credit report, so you can verify them for accuracy and address potential errors and fraud as they come up.
Building credit can take time, but the sooner you get started, the better off you'll be in the long run.