What to Know Before You Apply for Your First Credit Card

Woman online shopping with her credit card
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Once you’ve decided to apply for your first credit card and you’ve picked out what you think is the best one for you (there are lots to choose from), it’s time to fill out the application. Applying for your first credit card can be exciting, but a little scary, too. Knowing what to expect can ease some of your anxiety.

What's a Credit Card and Do You Need One?

A credit card looks just like a debit card, but instead of taking funds directly out of your bank account, you're essentially getting a short-term loan from the card's issuing bank. You may need to pay interest unless you pay off the card each month. It's difficult to say that anyone actually needs a credit card, although they're a great resource in an emergency.

Additionally, many people advocate for living debt-free, but credit cards help you build good credit, which enables you to buy a house at a favorable mortgage rate, get you approved for an apartment or cell phone, and even get lower premium payments on your insurance. Some credit cards also offer cash or travel rewards, which can provide free or highly discounted vacations if you use the card often and save up your points.

Credit Card Rewards Programs

When you save up your credit card points or cash-back rewards, you may wonder where the money comes from and whether you're actually paying for thee "freebies" through some type of fees.

Credit card rewards programs are actually funded by fees paid by the merchant's bank when you use your card. The fees go to your credit card's issuing bank, and at about 2 percent of each purchase, they're more than enough to cover rewards programs.

Secured vs. Unsecured Credit Cards

A credit card is a type of loan that you can borrow from again and again as long as you pay it back. Despite what you may have thought until this point, a credit card is not free money. As you take on the responsibility of having a credit card, keep in mind that you have to repay everything you borrow. This type of credit card is known as an unsecured card because the loan made to you is not secured by any type of collateral.

Without an established credit history, there’s a chance you could get denied for an unsecured card, especially if you’re applying for a credit card that’s intended for someone with good or excellent credit.

Students can improve their chances of being approved by applying for a student credit card. If you are denied, the credit card issuer will send a letter telling you the specific reasons for the denial. Once you get that letter, use the information to help you apply for a better-suited credit card next time.

Some banks offer secured credit cards for people that have no credit or have had issues in the past and need to rebuild their credit. These cards require a cash deposit to secure the card. As you use the card and pay responsibly, in many cases, you can reduce the amount of cash you need to keep on deposit, and at some point may be able to convert the card to an unsecured card.

EMV Security and Your Personal Information

Credit card issuers gather a good amount of personal and confidential information to process your card application. For instance, most applications request your social security number and other personal information like your date of birth. This allows the credit card issuer to confirm your identity and to check your credit with the credit bureaus—who also identify you by social security number.

Many cards have what's known as an EMV chip, which acts as a form of security to prevent your personal data from being stolen. This little chip, integrated into your card, generates a one-time code with each transaction. This keeps fraudsters from using your card. However, the chip can only protect you when you're using the physical card—it can't protect you if you're using your card to purchase online or over the phone.

Use a Physical Address

The address you put on your application is where your actual credit card and statements will come. Make sure you use a current and accurate address. Note that if you use a post office box in your address, it may delay your application processing because the credit card issuer needs to have a physical address for you.

Your Income

Credit card issuers are required to ask for your income information to ensure that applicants can repay what they’ve borrowed. If you don’t have enough income, you may have to wait until you get a job, or ask a parent or other adult to cosign for you. Your parents' income doesn't count unless you're on the account with them and have access to their regular deposit or they give you a regular allowance.

The Decision

Many online and phone credit card applications can be processed within seconds, giving you an approval almost instantly. Sometimes, applications take longer because some human interaction is needed, either to get more information from you or to manually review your application. Don't assume you've been denied just because you didn't get an immediate answer.

Low Credit Limit

When you’re first getting started with credit, credit card issuers will often start you out with a small credit limit to minimize their risk. It’s not a bad thing; you need time to get accustomed to managing a credit card, and a huge credit limit makes it too easy to get in over your head. Plus, credit limits are often tied to income, so if you're working part-time while attending college, your credit limit may be limited by your earnings.

Calculating the Minimum Payment Due

Credit card companies send you a bill each month that asks for the minimum payment on your account. This amount is the least you can pay while still keeping your account current and maintaining your credit score. There are two main ways that companies calculate the minimum payment for you:

  • Percentage method: The card issuer bases your minimum payment on a percentage of your card balance. It ranges from 1 percent to 3 percent, so a balance of $1,000 would require a minimum payment of $30.
  • Percentage plus interest and fees method: If you make the payment without paying off the card, you'll also pay interest, such as 18 percent. This amount is an annual rate, so you would divide by 12 months to get your monthly interest rate. An 18-percent interest rate on $1,000 would be 18 percent / 12 = 0.015. Multiply $1,000 * 0.015 = $15.00. If you pay after the payment due date, you might get hit with a $35 late fee. To add it all up, a 3-percent payment of $30, with a $15.00 interest charge and a $35 late fee means you'll pay $30 + $15 + $35 = $80 for the monthly payment. Unfortunately, the only part of your payment that actually reduces your card's principal balance is your $30, even though you paid $80. For this reason, it's important to make payments that are larger than the minimum amount, or you'll end up paying mostly interest and fees.

Your Credit History

Credit card issuers report your monthly credit card usage to companies known as credit bureaus, or credit reporting agencies. These bureaus maintain the credit history for every person with a credit card, loan, or other types of credit-based account. Certain credit card mistakes—like late payments and high balances—will show up on your credit report and make it harder to get other credit cards in the future.

Your Credit Utilization Rate

When you get your credit score, known as a FICO score, it's calculated based in part on how much of your available credit is being used. If you have two different credit cards with a total of $3,500 of credit available, it's important to use only about 30 percent of that amount.

This means that you can charge up to $1,050 on both cards combined before it starts to affect your credit score. If you use more than 30 percent of your combined credit card availability, your credit score will be lowered because you have become a bigger risk in terms of repaying your card balances.