A Beginner’s Guide to Starting Out With Credit
If you’re like most people, you first learned about credit when it came time to apply for a loan for a house, a car, or a beginner’s credit card. Maybe you got good news when you applied for a loan, or maybe you didn’t.
Either way, credit is one of the most influential aspects over your financial life. It even affects you in ways that you wouldn’t expect, such as helping you get approved for an apartment or utility services.
But credit can be a hard topic to understand. At the same time, it’s not rocket science. You can learn the basic nuts and bolts about how credit works in just a few minutes. To help you out, take a look at our beginner’s guide to starting out with credit.
What Does The Term “Credit” Actually Mean?
The word “credit” gets thrown around a lot, but what does it really mean? As it turns out, the word “credit” can actually apply to a bunch of different things.
At its simplest definition, credit refers to loaning money. In some cases, this means a traditional loan such as an auto loan, a personal loan, a small business loan, or a mortgage. For example, you might hear the phrase “applying for a small business line of credit.”
Similarly, credit can also refer to your ability to get a credit card. Lastly, you may hear about “building your credit”. This is when you take steps to improve your credit, such making all of your payments on time and not racking up a ton of credit card debt. When you do this, your credit will improve and you will become a stronger candidate for a loan with the best rates.
With this in mind, it’s a good idea to check your credit score and credit report regularly. A credit report is like a financial report card for grownups. Every time you take out credit or make a payment (or even miss a payment), those details are reported on your credit report by your lender. Lenders send in this information to one of two different credit bureaus that maintain your credit reports: Equifax and TransUnion.
Credit reports can be very long and dull to read. Yet, you can boil a lot of this information into a single number: your credit score. This is kind of like a grade on your report card from back when you were in school. Most credit scores range from 300 to 850 and the higher it is, the better.
Are You Ready for a Credit Card?
If you’re interested in building your credit score, one of the best ways you can do so is by applying for a beginner’s credit card.
It’s a big step, and before you do it, you want to make sure you’re ready. Many people get caught up in a cycle of overspending and debt. That’s the last thing you want to do — it’ll both harm your personal financial situation and your credit history.
To help you decide whether you’re ready for a beginner’s credit card or not, we’ll go through some basic tips about how to use credit responsibly. If you think you can handle this, chances are that it’s time for you to get a credit card of your own.
Decide What You Want in a Credit Car
There are many different types of credit cards, including theregular everyday credit card that allows you to make purchases and pay them off later. But here are a few other specialty credit cards that you might want to consider:
- Secured credit cards. These cards help you build your credit score if you don’t yet qualify for a traditional credit card. Companies require you to make a deposit and if you use your card responsibly, generally they’ll refund the deposit after a period of time.
- Cash back credit cards. These cards offer a certain percentage of cash back for each purchase you make.
- Travel rewards credit cards. Like to travel? Travel rewards cards offer you points or credits that you can redeem towards hotels, flights, cruises and other travel expenses.
- 0% intro APR credit cards. These credit cards offer APR bonuses that give you a period of time to charge purchases without paying any interest.
- Balance transfer credit cards. These are great cards if you want to pay off your debt with a lower interest rate. With a balance transfer card, you can move debt from another credit card to take advantage of a 0% APR intro offer like the one above. It allows you a small window to pay off your existing credit card debt with no interest
Which One is Best for You?
Do you need to boost your credit score or have you been denied for a credit card before? Do you want the freedom to earn cash back or travel rewards? Maybe you’d rather just use a traditional credit card so that you’re not tempted to spend more to earn rewards? It’s entirely up to you.
So, take the time to research available beginner’s credit cards and choose the one that suits your needs.
Always Make Your Payments on Time
One of the quickest ways to harm your credit score is by making late payments. That’s because an entire 35% of your FICO credit score is calculated from your payment history. The later the payment, the bigger the hit you’ll take.
Even worse, late payments will stay on your credit report for a full seven years before dropping off. The negative impact of late payments will lessen over time as they reach the seven-year mark, but still — why put yourself at a disadvantage for such a long time if you don’t have to?
One of the best ways to guard against late payments is to set up autopay credit card payments. This way, you can pay more if you want, but at least you won’t miss a payment. Along these lines, it’s a good idea to pay off your credit card in full each month if you can. The second-biggest factor in determining your credit score is how much you owe (it makes up 30% of your score), and the lower the balance on your credit cards, the better your score will be.
Here’s another benefit of paying off your beginner’s credit card in full each month: if you don’t owe anything, the credit card company can’t charge you interest! You’ll be able to earn points and rewards while building your credit score – all entirely for free.
Don’t Let Your Spending Get Ahead of You
One of the best ways to make sure that you are able to pay off your credit card bill in full is to make sure you don’t let your spending outpace your ability to pay it back each month. There are a few good ways to do this:
- Ask yourself this question prior to each purchase: “Do I really need this, or would I rather put the money into my savings account?”
- Keep an up-to-date budget and enter in (or sync) every purchase you make, even if you buy it with a credit card.
- Pay off your credit card on a more frequent schedule, such as once a week.
Don’t Close Old Credit Cards
Sure, you may have started with a beginner’s credit card, but once your credit score is higher, you may be tempted to go with a fancier, shinier card that offers better rewards.
That’s totally fine. But, make sure you keep your old card open. A smaller percentage of your credit score — 15% — is determined by your credit history and the length of time you have held your accounts. If you close your oldest accounts and open a new account or two, suddenly it looks like you’re a brand new credit user, and that makes you seem riskier to lenders.
Instead, a better option is to keep that old account open unless it’s really chafing you in some way or another. Put your old beginner’s credit card somewhere safe, and then pull it out once a year or so to make a single charge on it (and then pay it off). This helps to ensure that the credit card stays open and active, and that the credit card company won’t close your card for you.
Do you believe us now when we say that credit isn’t really as complicated as it seems?
All you have to do is develop good financial habits by avoiding overspending and racking up debt. From there, make your credit card and loan payments on time and in full if you can. Lastly, keep your old beginner’s credit card open even if you move onto other credit cards with better perks.
If you can do these things right, you’ll be well on your way to building a better credit score.