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4 Key Things to Know Before Deciding on a Credit Card

Credit cards are often a contentious topic in the personal finance space. They can be an incredible tool to build credit but can also land you in the worst possible debt to carry if you are not careful. In this piece, we’ll break down a few key things to know before getting a credit card.

Why You Need a Credit Card

Establish & Build Your Credit Score
The #1 reason you need a credit card is that it’s the easiest way to establish and build your credit score. Credit refers to the ability to borrow money or access goods or services with the understanding that you’ll pay later. How trustworthy you are to pay for your credit back, is measured by a credit score.

Why is a credit score important? If you’re planning to rent an apartment, get a car loan, or get a mortgage one day, all of these will require a credit score. A higher credit score also allows you to get the best interest rates and even have negotiation power when getting a loan.

Take Advantage of Credit Card Perks
There are a ton of options for credit cards and each of them comes with their own set of benefits and perks for being a cardholder. Some popular cards will give you cashback on all your purchases or help you rack up points you can redeem for travel credits. Most credit cards will also protect your purchases, which is great when you are buying things online.

4 Things to Keep in Mind Before Getting A Credit Card

Here are 4 things you should understand before signing up for a credit card.

1. Fees & Rates

Credit cards are notorious for their fees, so if you are not careful, credit cards can become quite expensive and damage your credit score.

Annual Percentage Rate (APR%)
This is the interest rate you’ll be charged on your credit card balance if you don’t pay off your credit card. APRs for credit cards are extremely high. On average federal student loan interest rates are 2.75% while the average credit card APR is 17.46% so you want to do everything you can to not have credit card debt.

Finance Fees
This is the actual amount you’ll be charged when you carry a balance on your credit card based on your APR and how your credit card company calculates this fee. Often you’ll have a grace period of 21-45 days before interest kicks in.

Late Payment Fee
If you miss a credit card payment, you’ll be charged a late payment fee. After a certain period of time, you’ll have to pay the late fee along with finance fees.

Annual Fee
Credit cards with high-value perks come with a flat annual fee you have to pay just for the privilege of owning the credit card. Make sure the perks of the card you are signing up for outweigh the cost of the annual fee.

2. Terms to Know

Along with the fees and interest rates associated with your card you’ll also want to know what these common terms mean:

Minimum Payment
This is the minimum amount of your credit card balance you have to pay each month by the due date to avoid the late payment fee. If you continue to carry a balance beyond the minimum payment, you will rack up interest on the remaining balance.

Credit Limit
This is the maximum amount of money you can borrow with your credit card. While it’s really tempting to keep swiping, keep track of your credit limit.

A good practice is spending within 30% of your credit limit. One of the major factors of your credit score is credit utilization which means if you are often maxing out your credit limit, you are at risk of negatively impacting your credit score.

3. Getting Your First Card

When you are starting out with your first credit card, it can be a challenge to be approved. You need a credit card to build credit but you also need credit to get a credit card. Frustrating, I know. One thing you can look into are secured credit cards.

Secured credit cards require you to make a cash deposit, equivalent to your credit limit. You still treat this as a regular credit card and make your payments each month. The cash deposit acts as a safety net. After showing responsible use of your credit card you can transition to an unsecured or regular credit card.

If you are a student, consider looking into student credit cards that have lower credit limits and make it easier for students to get approved.

Another option to start building is being added to a parent’s credit card as an authorized user. Pick someone who has a long history of paying on time and a card company that reports authorized user activity to credit bureaus.

4. Application Process

It can be super tempting to apply to multiple credit cards all at once, but this is something you should definitely avoid. Applying to a credit card is a hard inquiry on your credit report. Multiple hard inquiries can ding your credit score.

Pick your cards wisely and apply to just your top choice at first. Use one of the following tools to find the best credit for your specific situation:

We hope this is helpful as you think about getting a credit card! When used correctly, credit cards are the best way to build up your credit. However, if you already have a ton of debt or won’t be able to pay off your credit card in full each month, you might want to wait until you would be able to do that before getting a credit card. Credit card debt is extremely high-interest debt so avoid it as much as you can!

Kavya Ravikanti is the Founder of Young, Not Broke, a platform empowering Gen Z to manage their money through content, events, and community. Subscribe to their newsletter to receive content straight to your inbox or check out their website for more.

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