Credit cards seem essential for adult life, but the process of opening one can be confusing and intimidating. So this month, we’re making space to demystify the process of opening and maintaining a credit card.
Credit Card Basics
Before opening a credit card, be sure you fully understand how credit cards work. Credit cards are authorized lines of credit with a maximum amount the cardholder may borrow. Unlike a debit card, when using a credit card to make a purchase, the company processes the transaction and bills you later. Once the cardholder receives the bill, they must pay at least the minimum amount due or pay off the entire balance. If the card carries a balance from a previous billing cycle, then the company will charge interest.
Important Terms to Know
Here are some terms to know and general guidelines to follow when comparing different credit cards.
- Annual Percentage Rate (APR) is the interest rate charged on outstanding balances. If you are likely to carry a balance from month to month, it might be beneficial to look for as low an APR for which you qualify. (For context, the average APR charged in the third quarter of 2020 was 16.43%, so aiming to hit this number or lower is a good benchmark).
- Annual Fees are once-a-year charges some (but not all) companies impose just for having their card and range from $15 to hundreds of dollars. Cards with yearly fees typically offer additional benefits, namely reward programs such as cash-back. To determine if a card with an annual fee is right for you, reflect on if rewards are or are not a high priority for you. If such benefits are essential for you, be sure to weigh the rewards’ benefits against its costs.
- Credit Limit is the maximum amount of money you can borrow using that particular credit card. Unfortunately, an applicant may not learn their exact credit limit until after approval. Because of this, be sure to manage your expectations and purchasing plans. If your limit is lower than you’d like or need at first, make several on-time payments and then contact your provider to request an increase.
- Minimum Payment is the amount you must pay each month to avoid late fees and late payments impacting your credit score. Prioritize repaying at least the minimum each month, and if possible, pay a little more to reduce your outstanding balance and debt load.
Applying for a Credit Card
Though each institution will have a slightly different application process, here’s some general information companies will expect you to provide your application:
- Personal information (name, address, and phone number)
- Social Security Number or another means of identification
- Bank account information for the account you’ll use to pay your credit card bill
- Employer and occupation information
Be aware that credit card applications are often considered “hard inquiries” into your credit and slightly decrease your credit score. However, don’t panic – hard inquiries typically don’t affect your credit by more than a few points and will be removed from your credit history in approximately two years.
Build and Maintain Good Credit
After you’ve applied for and received your credit card, practice healthy habits to build your credit score.
Money Management E-Newsletter: February 2021