Getting Your First Credit Card

Credit Card Basics

Establishing Credit

Credit Card Safety

Credit Card Basics

How does a credit card work?

A credit card is a special card issued by a bank, retail store, or financial institution. Credit cards allow the cardholder to purchase items with borrowed money by using the card. Purchases made using the credit card are placed on the cardholder's account. The cardholder can then pay off the balance in part or in full later, usually within a month's time. The bank or financial institution provides monthly statements (paper and/or electronic) that include purchases made, minimum balance due, payments received, and credit available on the card.

Credit card companies and financial institutions charge interest on balances that are not paid in full within a month of making a purchase. They may also charge an annual fee for having and using the credit card. If the cardholder carries a balance on the credit card, he or she is responsible for paying a predetermined minimum payment on the balance each month. Late fees may be charged if payments are not made on time.

Credit cards also have a borrowing limit, which is usually determined by the cardholder's credit rating.
Using a credit card can help you build your credit history if you don't have one. A good credit history shows you are a reputable borrower, and helps you qualify for loans later. If you use a credit card wisely, make your payments on time, pay more than the minimum per month, and pay the cards off quickly, you will build a credit history that can help you make big purchases such as a home or vehicle down the road.

Credit card pros and cons

Pros:

• Ease. Credit cards are accepted nearly everywhere. Using a credit card saves you from carrying around a large amount of cash. Companies that provide big-ticket items (airlines, car rental companies, hotels and motels, etc.) usually don't accept cash, and using a credit card is more convenient, faster, and acceptable than writing a check.
• Protection. Financial institutions and credit card companies often offer buyer protection for purchases made with a credit card. For example, if something you purchased is stolen, damaged, lost, or did not arrive in acceptable condition, you may be able to recover all or some of your purchase cost or get a new item by working with your credit card company or financial institution. Your credit card statement also acts as a receipt in the event your original purchase receipt was lost or damaged.
• Credit. Using a credit card wisely can help you build a good credit history. Building a credit history can help you qualify for rental applications, different types of loans, and mortgages.
• Emergency preparedness. A credit card can be useful in case of an emergency when you need a place to stay, must travel on short notice, or your home or vehicle requires unexpected repairs. While it's unwise to treat a credit card as extra income, the card can come in handy when you need to pay for something large in a hurry and either can't use cash or can't access the cash.
• Bonuses. First credit cards often don't come with many extra benefits. But, as you build your credit history, you may become eligible for bonuses and rewards depending on the type of card you qualify for. You could receive discounts or special promotions at specific stores; free shipping from online retail establishments; discounts on airlines, insurance, and hotels; "points" you can redeem for merchandise or services; free or priority entry into cultural events and venues; or CashBack rewards when you use the card at specific retailers.

Cons:

• Interest rates and fees. You are responsible for paying interest on any balance you carry on the card. It makes good financial sense to pay more than the required minimum so you are paying down the money you borrowed, as well as the interest charges.
• Temptation. It can be easy to think of the available funds on a credit card as additional money for you to spend, especially if this is your first card and you are new to using credit. In order to stay on budget and keep your finances under control, it's important to avoid spending money you don't have by using a credit card. Keep careful track of how much you spend, and pay off your balance every month if possible. If you must make a large purchase that will take more than one month to pay off, decide on a set amount you will pay each month until the balance is back to zero, and budget for those payments.
• Risk. Credit cards can be stolen or compromised. The card can be physically stolen or misplaced. More commonly with the popularity of Internet shopping and electronic storage and transmission of credit card information, your credit card number and other personal data can be compromised.
• Debt. Credit card industry experts estimate that the average American household with credit card debt owes more than $15,000 on their cards, and that in many cases credit card debt outweighs savings in dollar amount. While getting your first credit card certainly does not doom you to a life of debt, it's a good idea to keep these statistics in mind as you embark on building a credit history for the first time. Your first credit card should be one step toward financial independence and health. As long as you keep spending in check and use your card wisely, you won't incur debt you cannot repay.

How do I get a credit card?

If you have no credit history, it can be difficult to qualify for a credit card. However, there are several options designed for first-time credit card holders.

Secured credit cards

A secured credit card requires you to put down a deposit on the card, often a few hundred dollars. You will then be provided with a credit card that has a spending limit equal to the amount of money you paid into the card. Secure cards allow you to start building a credit history by using the card to pay for purchases and making regular, on-time payments. At the same time, they have low risk for first-time credit card users because you can't spend more than the amount you put down on the card to secure it. After you have made on-time payments for several months on the secured card, the financial institution may allow you to move to a standard credit card with a higher limit and more flexibility.

Tip: Make sure the financial institution that is providing your secured card will report your payment history to the three main credit bureaus. This is an important step toward building a good credit history.

Becoming an authorized user on someone else's card

An authorized user on a credit card is able to charge against the account, but holds no contractual liability for the payments. If one of your parents (or even your spouse) adds you as an authorized user to a credit card, you will receive a card with your name on it that you can use to make purchases. However, you won't be able to make changes to the account, although you will be able to charge up to the card's spending limit. You also won't receive the monthly statements. If payments are made regularly and on time on the card balance or it's paid in full every month, this is a good way for an authorized user to start building credit history without carrying liability.

Student credit cards

Financial institutions often offer special credit cards geared toward full-time college students looking to start building a credit history. These cards vary greatly as far as terms, fees, and interest rates, so be sure to research offers thoroughly. Also, keep in mind that these cards can carry a balance up to the credit limit set on the card, unlike secured cards or authorized use of someone else's card. So, they come with risk that you could get into debt, particularly if you use the card for impulse purchases and don't pay off the balance every month. Used responsibly, student cards are a good way to start building a credit history from the ground up. Once you've established a good history with a student card, it can be easier to qualify for cards with higher limits, more rewards, and extra features and benefits later on.

How do I pick the right credit card?

Credit cards can differ greatly. Many people sign up for a first card without knowing the interest rate or fully understanding how it works. Take these steps so you understand your first credit card and choose the one that suits your needs best.

Read over terms and conditions

You might find that you are eligible for several offers from financial institutions and credit card companies for a first-time card. Read over all the terms and conditions of the credit card contract carefully and speak with the company if necessary to get your questions answered before you sign up for the card. Ensure you understand what the interest rate is and how it is calculated, what your minimum payment will be if you carry a balance each month, how interest rates are calculated, if there are late fees or other additional fees, and how your credit history with the card will be reported.

Apply while you are still a student

Applying for a first credit card before you leave college might give you more options than you will have after graduation. Find out if your credit union or a credit card company has a student card you can take advantage of to start building your credit history.

Try your local credit union or financial institution

The best source for a first credit card might be the local financial institution you already work with. Cards from local credit unions may also come with lower interest rates, more perks, and more flexibility for first-time cardholders who have a good financial history with the financial institution than cards from large credit card companies. Consider the Redstone Visa ® Traditional card. Visa Traditional cardholders enjoy Redstone Discounts! ®, Visa discounts, and no annual fee.

As your credit grows, so will your options

Even if you must start out with a student card or secured card now, using it wisely will soon build a good credit history that will work in your favor. Once you've been a credit card user for a while, you'll become eligible for different types of credit cards with lower interest rates, the ability to transfer balances at a low rate, rewards and incentive programs, perks for business owners or travelers, store-specific rewards, and other benefits. The key is to start slow with a credit card you can easily manage and pay off monthly so you build a credit history that will make eligible for loans and credit from many companies and lenders down the road.

Establishing Credit

How Can I Build Credit Responsibly?

Impulse purchases and credit cards don’t mix. Don't use your credit card to spend money you don't currently have. If you can't trust yourself not to use the card to buy things, put it away so you only use it for planned purchases.

You should make a plan that will allow you to pay off your credit card each month. If that’s not possible, pay the minimum plus a set amount toward the balance, and be consistent. Otherwise, you risk paying more for items than they are worth because you will be paying finance charges on top of the cost of the item.
In order to avoid late fees, make sure you know when your payments are due and how much they are. You are in control. You determine how much you charge on your card and how much you pay back every month. Remember, with every purchase and payment you make, you’re building your own personal credit history—your unique footprint that will stay with you for years to come and will affect purchases you make in the future. Paying more than the minimum every month looks good on your credit record and will help ensure that your spending doesn’t get out of control.

What is a credit rating?

Once you've gotten your first credit card and you’ve been using it for a while, you'll start to build a credit history and you will get a "credit rating." This rating is what lenders use to decide whether or not to let you borrow money.

Your best guess, combined with your credit report, is all you're going to have to figure out your credit rating. All three of the credit bureaus below have a rating system. The problem is that they don't, and won't, disclose it.

Accessing your credit reports

The reports contain a list of your credit cards, whether the accounts are active (being used) or not, and a summary of any credit problems you've had. If you have a history of paying late or slowly, have had collection procedures initiated against you, or have filed for bankruptcy, these things will almost certainly show up in your reports.
The Fair Credit Reporting Act requires each of the nationwide consumer reporting companies—Equifax, Experian, and TransUnion (see below)—to provide you with a free copy of your credit report, at your request, once every 12 months. But there's only one online source authorized to do so. That's annualcreditreport.com. Beware of other sites that may look and sound similar. Also, if you've been denied credit in the past 60 days, you are entitled to receive a credit report free of charge.

There are three main credit reporting agencies. Your creditors might use one or any combination of the three.

They are:

Experian
1-888-397-3742

Equifax
1-800-685-1111

TransUnion
1-877-322-8228

You can obtain a copy of your credit report online using the websites listed above or call the companies for further information.

It is a good idea to check your credit report for errors every few years, whether you have debt problems or not. Check with each company to see if there is a charge to obtain your credit report.

The reports come with an explanation of what all the entries mean, but they can be very hard to read. If you do find errors on your report, each agency has steps you can take to fix them. For many people, the process will take a few months. You can also have a statement placed on your report if you had debt problems for good reasons, like job loss, divorce, or illness.

To fix errors or post a statement, write to the address listed on your credit report.

If you still have questions about credit reports or if you’d like to talk to a trained financial counselor about your credit score, free financial counseling is just a click away.

Credit Card Safety

Are credit cards safe?

Credit cards are basically safe, but credit cardholders are also subject to fraud every day, according to the Federal Trade Commission. Credit card fraud can occur when you make a purchase online and someone hacks your account. You can also become a fraud victim when someone finds your account number and information and uses them to make purchases. You have a responsibility for protecting your credit card and your credit history from fraud. Incorporating a few safety checks into your credit card routine can help you stay safe.

Fraud protection practices from the FTC

• Don't give out your credit card number over the phone unless you initiated the call to a company you know is reputable.
• Don't keep your cards in your wallet or purse. Store them separately in a safe place. Only carry the one card you need to make a purchase that day.
• Make sure you get your credit card back from the cashier or clerk after you've made a purchase.
• Don't sign a receipt that does not have a total printed on it. Draw a line through any blank spaces above the total, such as those designated for a tip amount.
• Compare your printed receipts to your credit card statement each month. Immediately report any discrepancies or questionable charges to the card issuer.
• If you will be traveling or moving, notify your credit card company or financial institution.
• Don't write your credit card number or PIN number someplace where someone could see it easily.
• Shred statements, receipts, and any other paperwork that has account information on it before disposing of it.

Tips for Making Online Purchases

• You may be a veteran online shopper, or you might be just contemplating making your first credit card purchase over the Internet. Either way, you should take certain precautions when using your credit card online.
• In most cases, using your credit card online is just as safe as charging purchases at your favorite store. There are safeguards you can use to prevent fraud and abuse when charging items online. The following will help you have peace of mind as you shop the Internet.
• Designate one credit card exclusively for online use. This will enable you to track your online charges, and to easily identify Internet credit card fraud if it occurs.
• When ordering online, print and save the receipt. Compare this receipt to your monthly credit card statement.
• When you receive your monthly credit card statement, review it carefully. Contact the credit card company immediately with any discrepancies.
• Immediately report to your credit card company any lost or stolen credit cards or any fraudulent activity with your card.

Do business only with secure sites

These sites use encryption when submitting data over the Internet. Computer users can quickly identify whether a site is using encryption by looking for the closed lock or closed key symbol in the browser. If the lock or key are closed, the site is using encryption software and is secure. Do not send your credit card information unless the site is secure. Although encrypted sites do not guarantee against fraudulent activity, the encryption should prevent your personal information from being stolen before it arrives at the intended site.

It is never a good idea to send your credit card information by email. If there is no other way to get the credit card information to the intended user, it is a good idea to send parts of the information in multiple emails, i.e., send half your number in one email, half in a second email and the expiration date in a third email.

When using passwords, do not use common names or your Social Security number. Mix letters (upper and lower case) and numbers whenever possible.

Try to do business with reputable sites only. Although this may be difficult over the Internet, trust your instincts. If the site does not appear legitimate or if the offer is "too good to be true" don't take the chance on ordering.

Report fraudulent activity immediately

If fraudulent activity occurs with your credit card, excluding electronic funds transfer (ATM), you will be responsible only for the first $50 of fraudulent charges (per card). Many financial institutions will waive this fee if asked.

Overall, the Internet is a fairly safe place to do online credit card shopping. Follow the guidelines above, and always check your monthly statements against your records of what you actually purchased.