The world of credit cards is surprisingly complex, despite its outward appearance of simplicity. When you’re just starting your quest to establish a strong credit profile, dealing with fees, penalty APRs, and decreases in your credit score is not exactly what you want to deal with. However, seemingly insignificant credit card decisions can have substantial effects on your finances. It’s not ideal to learn about them through trial and error either; doing so can put you in a financial situation that necessitates a protracted credit-rebuilding process.
Fortunately, you can remain on top of things by learning more about credit cards. If you’re considering applying for your first credit card, being aware of certain important information can help you get ready for responsible use and comprehend the terms of your agreement. Before applying for your first credit card, you should be aware of the following six items. This will help you build a strong credit history.
1. Beforehand research on rates and fees is possible.
The two things that will help you save money when using your cards are getting a low-interest rate and avoiding surprise fees. This is one of the most crucial credit card tips to know. However, a lot of prospective cardholders are unaware that you can learn more about a card’s fees before you apply.
On credit card applications and on the websites of many lenders, you can find information on interest rates and fees. You can study the annual percentage rate (APR) range, annual fees, late fees, and international transaction costs before you apply and let the lender execute a hard pull on your credit report, which might affect your credit score, even though the details may occasionally be difficult to locate.
The credit limit that a lender will grant you is often not something you can find out in advance because it depends on your unique credit record. Your specific interest rate, which is typically determined by your creditworthiness, is the same.
2. It’s Possible to Avoid Fees and Interest
Many first-time credit card users believe that interest and fees are only one aspect of the situation. However, if you use your credit card wisely, you may be able to prevent some of these expenses.
First off, not all credit cards have annual fees, so selecting one without one will save you money. Foreign transaction fees won’t apply if you don’t make charges outside of the country, and lenders only impose late penalties if you miss payment due dates. You avoid those fees by declining balance transfers and cash advances. Likewise, you won’t pay over-limit costs if you choose not to use over-limit protection.
Finally, you won’t even be charged interest on your purchases if you pay up the entire balance on your card before the payment cycle expires. Because all cards are required to have a grace period, you can avoid paying this standard expense.
3. Multiple Unwanted Effects Can Result From Late Payments
You normally incur more than one penalty if you forget to make a credit card payment. Instead, you might have to deal with three. How come?
First, late fees, which are imposed when payments are simply not made by the due date, are sometimes assessed for missing payments. Second, failing to make a payment may result in a penalty APR. Penalty APRs boost the amount you’ll pay on the existing balance as well as all upcoming charges, even though not all credit card firms utilize them. That’s a major deal, given that penalty APRs are typically higher than 20%, and some may even reach 30%.
Furthermore, missed payments lower your credit score. About 35% of your overall score is determined by how consistently you make payments on time. Your score could drop by 100 points or more as a result of even one late payment.
4. Using all of your available credit could lower your score
The credit limit on your credit card will be determined by the issuer. While it could appear that spending up to that amount has no negative consequences, that isn’t quite the case.
Your credit score normally declines if you max out your credit card, which means you run up your bill to the maximum limit. This is due to the fact that your credit usage ratio—your card balance in relation to the card’s credit limit—ends up being high. When you use more than 30% of your credit limit, your card company and the credit reporting agencies may conclude that you’re a riskier borrower. As a result, until you reduce your utilization percentage once more, your credit score may decline.
Even if you are unable to keep it at or below 30%, aiming for a low number is beneficial. The further away from your credit limit maximums you are, the better.
5. Making Minimum Payments Is Not a Smart Move
The minimum payment is all you theoretically need to do to maintain good standing with your card issuer if you’re carrying a balance, which means that portion of your balance carries over to the following billing cycle. This approach is unwise, though, if you wish to pay off whatever card debt you may be holding. As your balance decreases, your minimum payment gets smaller. As a result, the further along in repayment you are, the less your balance will decrease.
Use a better approach for paying off your card if you want to save interest costs and pay off your debt in a timely manner. As a starting point, have a look at the minimum payment on your outstanding balance. Then, determine if you can afford to pay extra by comparing that to your budget.
Consider that amount to be your official, ongoing monthly payment once you have it. Regardless of your new monthly minimum payment, send that amount. This enables you to pay off the debt using a method akin to an installment loan, resulting in lower interest over the course of the debt and a shorter amount of time until you have to repay it in full.
Just keep in mind that if you incur any more charges, you will need to reevaluate your payment. This makes sure you take the balanced growth into account. This may make it easier for you to quickly get back on track with your payback schedule.
