Content provided courtesy of USAA | By J.J. Montanaro
I still remember the excitement generated by my first credit card. Years from becoming a financial planner, I saw all the upside – the world was a swipe away – and none of the downside. Thanks to good guidance from my parents, good luck and a good wife who keeps me on track as she lives and breathes a "spend less than you earn" lifestyle, there have never really been any issues with credit cards. That’s not always the case, so you want to get off to a good start.
If you’re thinking about taking the leap, here’s a three-step roadmap to doing your first credit card right.
1. Recognize the utility. There’s real value in obtaining and responsibly using a credit card. Here are several examples that come immediately to mind:
You begin to build credit. Responsibly using a credit card is a definite plus for your credit history and score. The unsecured nature of this type of debt makes how you handle it a key factor in how prospective lenders view your credibility (pun intended).
A credit card makes travel easy. Whether you’re renting a car, buying airline tickets or reserving a hotel, a credit card will facilitate the process. Yes, you may be able to get it done without a credit card, but it won’t be as easy and it may mean losing access to a sizable chunk of what’s in your bank account.
You get some serious protection. A few years ago, we bought my daughter a salon package as a gift. A month later, the salon went out of business, before my daughter used her voucher. A quick call to the credit card company and we had our money back. That’s one example, but there are a whole lot more from additional protection when you’re renting a vehicle, extended warranties and fraud protection.
2. Shop for the right card. There are a whole lot of choices, but here are a few key factors that may help you pick your first card:
Focus on costs. I’m not sure there’s any reason for you to pay an annual fee for the privilege of using your first credit card, so that’s something you’ll want to steer clear of if possible. You’ll also want to compare penalties, other fees and grace periods all covered in the fine print of the application.
Look for a lower interest rate. While your goal should be to pay off the credit card anytime you use it — there’s no need to even wait until the payment is due — there may be times when you’ll pay interest and, of course, the lower the Annual Percentage Rate, the better.
Other benefits. Cash back, frequent flyer or other program points, exclusive discounts and lack of foreign transaction fees are all examples of benefits that could figure into your decision on your first card.
3. Use with care. This is where the rubber meets the road on doing your first credit card right.
Create credit history, not debt. You are shooting to add a convenient tool to your financial tool box and build a track record of effectively managing credit. Neither require you to carry a balance on your credit card and you certainly don’t want to run up a bunch of debt.
Stay within the guardrails. The critical guardrail of managing your personal finances is spending less than you earn and saving consistently. Having a credit card is not a reason or excuse to stray from that philosophy. If you’re using your new credit card to buy what you cannot afford, stop. That’s a one-way ticket to a credit disaster. How do you know you’re on track? You pay off your credit card in full each month.
Pay on time every time. This is the most critical factor in building a solid track record with credit, so don’t go astray with your credit card or any of your other obligations.
Getting your hands on your first credit card is a rite of passage of sorts; make it a passage to a happy place and not a nightmare.