Getting a first credit card is a big financial step — one that feels scary to many young adults.
I was one of those people reluctant to get my first credit card. My parents warned me how easy it was to get in over my head with credit card debt, so I avoided it in college. Even after graduating, I didn’t see the value of getting a credit card. Now I know that I missed out on plenty of perks.
From building credit to earning rewards, there are several important benefits that come with a credit card. If you have yet to take the plunge and get your first credit card, it’s time — here’s why.
How your first credit card establishes credit
“Having a credit card is important because it helps someone establish credit history,” says John Ganotis, founder of Credit Card Insider. Many millennials prefer debit cards, but as Ganotis points out, “Using a debit card does not help build credit.”
Take me, for instance. After graduating, I figured my student loans would be enough to help me establish good credit. But that didn’t happen — at least, not fast enough.
“Credit cards often get a bad rap, but when young people avoid building credit they may have trouble renting an apartment, getting a cell phone contract, financing a car, or eventually buying a house,” Ganotis says.
Those were exactly the issues I encountered. With almost nothing on my credit history, my credit score was in the 400s. It was so abysmal that I couldn’t be listed on the lease of the first apartment my husband and I shared.
Better credit mix
I got my first credit card shortly after that experience, and after two years of building credit I had a barely acceptable credit score in the 600s. If I had relied on my student loans alone to build credit, it’s unlikely my credit score would have improved as quickly.
That’s because a mix of different credit types is a key ingredient of a high credit score.
“In the credit scoring model, type of credit (or credit mix) determines up to 10 percent of the total score,” Ganotis points out. “So by not using revolving credit [like a] credit card, you are just limiting your credit score from the very beginning.”
Lenders like to see different kinds of accounts on your credit report that shows you’re a responsible borrower, no matter the type of credit.
Longer credit history
“One factor in credit scoring models is the average age of accounts, so to maximize that factor it’s better to get a card sooner rather than later,” Ganotis explains.
Two years after getting my first credit card, I had OK credit but a short credit history. It caused problems when looking for a new apartment. A couple of our rental applications were rejected — the main reason for the rejections was my thin credit file.
In contrast, Rachel Cohen, a personal finance blogger at Not Winging It, got her first credit card at 20. She started building credit well before she needed it. “I am super glad that I got a credit card when I was 20 because my credit history is now six years old and my score keeps climbing,” Cohen says.
Higher credit limits
Your credit utilization, or how much you’ve borrowed compared to your credit limit, is also key to your credit score. If you’re building credit, you should keep your credit utilization under 30 percent.
However, most people have a pretty low credit limit for their first credit card. For example, if your credit limit is $500, you could only charge $150 to your card before your credit utilization exceeded 30 percent.
“The longer you show that you make payments on time, the more credit a creditor may be willing to extend,” says Ryan Frailich, a financial planner with Deliberate Finances. As you use a credit card responsibly, many credit card issuers will automatically increase your credit limit. A bigger credit limit makes it a breeze to maintain a good credit-building utilization ratio.
Positive credit card payment history
I avoided getting a credit card because I was worried about the dangers of credit card debt. Like many young people, I wasn’t very clear on how credit cards worked, and I didn’t trust myself to resist the temptation to overspend.
However, “As long as the card is used responsibility, getting a credit card does not mean getting into credit card debt or paying any interest or fees,” Ganotis says.
The first rule of responsible credit card use is to always pay at least the minimum, on time, every month. Your payment history is the biggest factor that determines your credit, so make sure it’s perfect.
Additionally, limit credit card purchases and aim to pay off your credit card balance in full each month. This will help you avoid credit card interest and debt.
How to choose your first credit card
Beyond building credit, however, there are other perks of getting your first credit card. These include credit card rewards, price protection, and stronger fraud protections.
When choosing a starter credit card, you want to make sure the benefits aren’t outweighed by the costs. Try to choose a credit card with a low APR or even a 0% introductory rate. This will help you keep costs low if you must carry a balance while building strong credit card habits.
You’ll also want to watch out for fees. The best first credit cards will have no annual fee. Look for low fees for other transactions like cash advances, foreign transactions, or balance transfers.
Lastly, consider other benefits. Credit card rewards can offer cash back on purchases.
“Combining initial bonus and cash back or rewards for spending, you potentially can earn (or save) hundreds of dollars every year,” says Alex Gerard, a personal finance expert and founder of credit card comparison site Cards Mix.
Many credit card issuers are starting to offer free monthly FICO score updates and access to other credit-building tools. Some cards offer features like forgiveness for your first late payment, perfect for a credit card first-timer.
Your first credit card is an important step, so choose a credit card wisely and spend responsibly. If you’re careful about how you manage your credit cards and other debts, you’ll start building credit and reap other benefits along the way.
Interested in a personal loan?Here are the top personal loan lenders of 2019!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.95% to 35.89%*. The origination fee ranges from 1% to 6% of the original principal balance and is deducted from your loan proceeds. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at the time of application. The average origination fee is 5.49% as of Q1 2017. In Georgia, the minimum loan amount is $3,025. In Massachusetts, the minimum loan amount is $6,025 if your APR is greater than 12%. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months. Borrower must be a U.S. citizen, permanent resident or be in the United States on a valid long term visa and at least 18 years old. Valid bank account and Social Security number are required. Equal Housing Lender. All loans are subject to credit approval. LendingClub’s physical address is: LendingClub, 71 Stevenson Street, Suite 1000, San Francisco, CA 94105.
†Per reviews collected and authenticated by Bazaarvoice in compliance with the Bazaarvoice Authentication Requirements, supported by anti-fraud technology and human analysis. All reviews can be reviewed at reviews.lendingclub.com
**Based on approximately 60% of borrowers who received offers through LendingClub’s marketing partners between January 1, 2018 to July 20,2018. The time it will take to fund your loan may vary.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
*If approved, the actual loan terms that a customer qualifies for may vary based on credit determination, state law, and other factors. Minimum loan amounts vary by state. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|5.47% – 17.67%1||$5,000 - $100,000|
|5.59% – 35.99%||$1,000 - $50,000|
|7.99% – 35.89%*||$1,000 - $50,000|
|5.99% – 24.99%2||$5,000 - $35,000|
|5.99% – 29.99%3||$7,500 - $40,000|
|6.79% – 20.89%4||$5,000 - $50,000|
|9.99% – 35.99%5||$2,000 - $25,000|
|6.95% – 35.89%6||$1,000 - $40,000|
|5.99% – 17.24%7||$5,000 - $75,000|
|9.95% – 35.99%8||$2,000 - $35,000|