Answers To 6 First-Time Credit Card Holder Questions

Building a good credit history is essential for making the most of your financial options. Credit cards are an important part of cultivating a viable and useful credit history.

However, getting a credit card for the first time can be somewhat intimidating. The “fine print” included in most credit card agreements is enough to overwhelm even seasoned credit card customers, and probably raises more questions than answers for prospective cardholders.

Fortunately, there are some simple questions you can ask that will help you better understand credit cards and how credit works. Here, we’ll answer 6 common questions from new credit card consumers.

1.) How Does My Credit Score Affect My Ability to Get a Credit Card?

Your credit score is one of the most important factors governing whether or not you qualify for a credit card. A poor credit score can occur for many reasons.

This includes student loans, hospital bills, regular monthly expenses, and payments on loans and other financial tools. To have a good credit score, you must:

• Ensure that payments are made in a timely manner, regardless of what type of payment you’re making. Whether it’s your rent, cell phone payment, student loan, or even car insurance, paying on time will give your credit score a boost.
• Avoid over-applying for credit. Every time you apply for a credit card or other line of credit, it creates a “hard inquiry” on your credit report. Taken as a single incident, these inquiries don’t have a big impact; however, when you have several, they can drag down your score and prevent you from being approved for credit when you really need it. Hard inquiries stay on your credit report for up to two years, meaning that their effect can be felt long after you’ve forgotten you even applied for the credit in the first place. Avoid hard inquiries as much as possible, especially if you aren’t sure you’ll be approved.
• Keep your balances in check. Your credit relies on not only how prompt you are in paying your bills, but also on how much credit you currently have and what percentage of it is in use. If you have a credit line of $1,000, for instance, and you’re carrying a $500 balance, your credit usage is considered high, at 50%. Keeping balances at or below about 25% of your available credit will look better to prospective lenders than would a higher percentage of use. This lets lenders know that you can (and do) control your spending.
• Don’t default on loans. Any line of credit on which you’ve defaulted (failed to pay for a certain period) can greatly impact your credit score. Student loans that are in default status are very detrimental to your credit. It’s also very bad for your credit to file for bankruptcy, as this indicates to lenders that you’ve had insurmountable credit issues in the past. Bankruptcy may result in increased offers of credit from unscrupulous lenders, as they know you can’t file to discharge your debts again for at least seven years. Seven years is also the period for which most defaulted debts remain on your credit report.

2.) How Does Having a Credit Card Affect My Credit?

Getting a new line of credit can either hurt or help your credit score, depending on how you handle it. Typically, your credit card payment is due a certain number of days after your billing cycle ends, usually at the end of each month.

By paying the bill on its due date, you’re demonstrating that you are worthy of the trust placed in you by the lender. Keeping payments up to date can result in a better credit score, as well as increased lines of credit.

Should you forget to make a payment, you may face late fees and an increased interest rate (the amount you pay for borrowing the money). Late payments can also result in increased interest on other lines of credit, too, even if they aren’t directly related to the account with the late payment.

However, most credit card companies won’t report a late payment to the credit bureaus until it’s past due by thirty days. This means that even though you’ll likely be hit with late payment fees, you might not see an impact on your credit score until the payment is very late.

Some credit card companies offer the option of choosing your payment due date, so be sure to ask if that’s available with your new account during the account setup process.

Remember, even a single late payment can result in big penalties, so don’t put more on your new credit card than you can afford. Credit cards, like personal loans, are not just “free money.” The balances must be repaid in a timely manner in order to keep your account, and your credit, in good standing.

3.) Can I Have More than One Credit Card?

This is a question that greatly depends on your credit history and creditworthiness. Some credit card companies offer a large range of credit cards, meaning that you may run into the same company repeatedly when applying for a credit card.

Try to steer clear of having too many applications with the same company; when the company denies you for a credit card, for example, don’t apply for another card from the same company as you’ll likely be denied.

These denied applications create hard inquiries on your report and can be a red flag for other lenders, especially if you make a lot of applications in a short period of time.

Different companies have different requirements to be approved for a credit card, so try to do your research and find a card (and company) that works well for you. Some companies cater more to students and other young borrowers, and often have a more relaxed set of requirements for approval.

However, you’ll likely pay for those relaxed standards through higher interest rates, annual card fees, and other charges. Some card companies even offer an initial card that has a very low limit (usually around $250) which is eaten up by application fees, service charges, annual card fees, and other charges. That $250 line of credit is usually completely devoured by these charges, and you’ll have to pay them off before you can make any charges on your card.

Beware of these types of cards. While they’re easy to get and can be helpful for someone trying to start building a credit history, the charges that accompany them are very high. In the end, they may be much more trouble than they’re worth.

4.) What’s the Difference Between Secured and Unsecured Credit Cards?

Some new credit card customers find that they’re asked to provide a deposit that’s equivalent to the credit line available on the card. This is known as a “secured” credit card because the lender already has collateral in case you don’t make your payments.

“Collateral” is a security for a loan, such as when a mortgage loan is taken out on the home. The home then becomes the collateral to secure the loan. If you don’t make your mortgage payments, the lender can then repossess the property to make them whole on the money you borrowed and didn’t repay. A secured credit card works in much the same way: the money on deposit is used to repay the loan if you fail to make payments.

An unsecured credit card does not have a deposit to secure it. Instead, the amount for which you’re approved is granted on the basis of your credit score and credit history. The lender does not have a deposit on hand to cover your charges if you don’t pay. Instead, they would have to begin debt collection proceedings to recover the funds.

Secured credit cards can be a helpful option for those who are trying to build or repair their credit history. The interest rate may be much lower than that available with an unsecured card, but the credit limit is based strictly on the amount the lender is holding as surety on the credit line. Some companies also offer secured cards that only remain secured for a specific period of time.

After making regular payments and maintaining your account properly, the company can then offer an unsecured credit line above the secured amount, or may refund the deposit amount and leave the credit limit as it was on the card.

5.) Can I Treat Credit Like Cash?

Credit lines are not the same as cash and should not be considered as such. For starters, cash doesn’t require that you pay anything to use it. Credit cards have an interest rate, which is the amount you’re paying for using the company’s money.

Even though some cards have a “0% introductory interest rate,” it won’t stay that way forever. Credit cards are borrowed money and should be regarded as a debt, not an asset. Credit cards can be very helpful in emergency situations, and can help maintain your finances in a more balanced way, but only if you use them properly.

Using credit cards for day-to-day expenses can result in paying much more than you would if you just paid the debt with cash, though, so beware thinking of or treating a credit card like it’s the same as the cash in your wallet (or bank account).

On the other hand, credit cards can easily be stolen and used by unauthorized people, so keeping them secure (as you would your cash) is essential. Even though most companies offer some protection against unauthorized charges, you can still end up owing hundreds of dollars if you don’t notice your card has been lost or stolen.

The rules regarding unauthorized charges vary from one company to another, so make sure you ask questions about this type of protection when you’re searching for the right credit card for you, and always, always, ALWAYS protect your cards as you would any cash in your wallet.

Experienced thieves can make short work of your credit limit if they get a hold of your card. They don’t even need to have physical possession of your card to do it.

Don’t post your credit card numbers online, including pictures of your new card. Make sure you’re completing any online shopping through reputable and secure sites. Also make sure you monitor your account on a regular basis for any charges you don’t recognize. Should you find an unauthorized charge, contact the card issuer immediately.

6.) What’s the Best Credit Card for Me?

This is a difficult question to answer on a broad scale because each borrower has specific needs that may not be an issue for other borrowers. Keep in mind that nearly everything about a line of credit can be negotiated, depending on the lender.

Some lenders will negotiate a better interest rate if asked; especially if they believe you might switch to another card issuer without that concession. Some companies allow you to set your own payment date so that it fits into your monthly bills more easily. Some offer flexible credit lines, various incentives and rewards options, low introductory rates, and many other perks, but you may not get them if you don’t ask about them.

Most companies consider that you have accepted the terms and entered into a contract with them once you use the card the first time. For well-qualified borrowers with good credit histories and scores, there may be even more options available, so make sure you know what you’re getting before you sign on the dotted line, as it were.

Becoming a Conscientious Borrower

Being a conscientious borrower is an important part of creating and maintaining your credit history. Make sure you know how much you can afford to spend before you spend it. Even though you have credit available on a card, that doesn’t mean you can automatically afford to borrow up to that limit.

Remember, credit cards come in as many types as there are borrowers. There’s almost sure to be one that will fit your credit situation, but be aware of how much you’re borrowing and the strings that are attached to it.

For more information on credit card management, contact Partners Financial FCU online or at 800-321-5617.