Learn how, where, and when to apply for a credit card. Understand what a credit score is and how it changes based on your credit card use and history. Know why a credit score is important and how it helps your future. Lastly, a brief introduction to the three credit bureaus and their functions.
First, understand your credit history up to this point. Have you been an authorized user under someone else’s card before? If yes, you should already have a credit score and an established history to keep in mind. If not, one of the best ways to see if you are pre-approved for a credit card is to go to Capital One and see if you are pre-approved. It does not affect your scores to see if you are pre-approved. If you are then it is best to take the card that has no annual fee (for your first card).
Using Capital One is our suggested start, however, make sure to research credit cards that are best fit for your situation as a first-time applicant. Beginner cards often have lower credit limits and may be easier to qualify for. If you have no credit history, a secured credit card might be a good option. You deposit money as collateral, which becomes your credit limit. Capital One, Chase, Discover, and many companies also provide student cards, which are unsecured but also help build credit all the same. The difference between unsecured and secured cards is that secured cards require an upfront security deposit, which becomes your credit limit. For example, a $500 deposit usually means a $500 credit limit. The deposit serves as collateral for the card issuer in case you default on payments. The benefits of this include easier approval, as the security deposit reduces the risk for the card issuer, and they are better for those with no previous credit history. Unsecured cards require no security deposit, have stricter approval rates (as there’s no security deposit to mitigate risk), and are ideal for individuals with an established credit history. Ultimately, the purpose of a secured card is to build credit or try to improve a poor credit score. It’s a stepping stone to unsecured credit cards. Unsecured cards are best for managing cash flow, earning rewards, and maintaining a good credit score. If you have a good credit history and want to take advantage of higher credit limits, rewards, and benefits, unsecured cards are your best option (which you should consider if you have previously been an authorized user).
What is a credit score? It is the numerical representation of a person’s creditworthiness, ranging from 300 to 850. It is calculated based on an individual’s credit history, payment history, amounts owed, length of credit history, types of credit used, and new credit inquiries. Lenders use credit scores to assess the risk of lending money or extending credit to an individual. A higher score indicates a lower risk.
Once you have decided what kind of card and bank best suits your situation, compare interest rates (APR), annual fees, rewards programs, and any other fees associated with the card. These differ depending on the option you choose, so this requires you to analyze which option best aligns with your finances. You will typically need to provide personal information such as your Social Security number, proof of income, and employment details when applying for a credit card. It is ideal to make sure you are strong in these areas and, as a younger first-time credit applicant, it should be relatively simple. Most banks and credit card companies allow you to apply online, however, we recommend going and doing so in person to be able to discuss your application process and options with your banker. Again, make sure you understand the terms and conditions, including the interest rate, fees, and how to avoid penalties. Once you fill out your application and submit it, it may take a few days to a couple of weeks to receive a response. If approved, your card will arrive in the mail. Finally, follow the instructions to activate your card, usually by phone or online.
Now that you have a credit card, congratulations! You officially have a credit score (if you have not previously been an authorized user). With great credit, comes great responsibility, so it is vital that you use your card responsibly as a first-time credit user. Some brief tips before we delve deeper into how to establish and maintain a good credit score. First, monitor your transactions to avoid overspending. Second, if you ever cannot pay off your balance in full, try to pay more than the minimum to reduce interest charges. Third, avoid cash advances, which often come with high fees and interest rates. Move on to the next section to learn more about credit scores.
As stated before, if you have been an authorized user previously then you already have a credit score, but if you have not and have just received your first credit card then you must understand how to maintain a good credit score. Firstly, let us go over some basic ways to maintain and monitor your credit score.
You should be monitoring your credit score regularly so you can track your credit-building progress and identify any errors or fraudulent activity. Finding your credit score is easy, as there are a plethora of methods. You are entitled to one free credit report per year from each of the three major credit bureaus (Equifax, Experian, and TransUnion). Don’t worry about them too much yet, we will get into more detail about them later. However, after your free credit report, you will have to purchase it from these sources. Regardless, many credit card issuers provide free credit scores to their customers, often included in monthly statements or available through their online account portals or apps. The Chase and American Express apps contain portals where you can check your credit score. There are also free websites to check your scores as well. Credit Karma, Credit Sesame, and Mint are websites where you can get a free report, although this is not a recommended method because the reports may not be entirely accurate or up-to-date.
A good credit score is considered to be anything above 670. However, you ideally want your credit score above 700, and anything above 750 is a great score. Poor credit scores are generally any score sub 650 in the 500 range. Very poor credit scores, which are quite difficult to obtain, are anything within the 300 to 400 range. Missing a payment will not completely tank your score, but missing a few payments begins to start to seriously dip your score. In a different section, we will go deeper into how to maintain and establish a good credit score and how to fix a bad one.
To put it simply, a good credit score makes your life financially easy. What exactly does this mean? Having a good credit score leaves numerous opportunities open for you financially such as:
Again, simply put, with a poor credit score the previously mentioned benefits are nonexistent. While these benefits may seem pretty distant for a college student or a young person, they are necessary for having a financially free and well-off future. In the next section, we will go into more about how to maintain good credit, fix bad credit, and levy your high score to benefit your life in more ways. Before that, however, below is a simple guide to the three credit bureaus.
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The differences:
Each bureau collects information from different sources, so the information on your credit report may vary slightly between them. This can result in slight differences in your credit scores. While all three bureaus use the FICO scoring model, they also utilize their proprietary scoring models, which can lead to variations in the credit scores they provide. Each bureau offers unique tools and services, such as Experian Boost or TransUnion’s credit score simulator, which can help consumers manage and improve their credit.
Why these matter:
Lenders may pull reports from one or more of these bureaus when assessing your creditworthiness. It’s important to check your reports from all three to ensure accuracy and consistency. Since the scores can vary slightly between bureaus, understanding the range and factors affecting each score can help you better manage your credit.
One of the oldest credit bureaus, founded in 1899. Provides credit reports and scores, identity theft protection, and credit monitoring services. Offers business credit reports and services for lenders. Equifax offers a credit score known as the Equifax Credit Score, which is slightly different from the FICO score.
A global information services company founded in 1980. Also provides credit reports and scores, credit monitoring, and identity theft protection. Experian Boost allows consumers to add positive payment information from utility and phone bills to their credit reports. They also use the FICO model for scoring.
Established in 1968. Again, provides credit reports and scores, credit monitoring, and identity theft protection. TransUnion offers a credit score simulator to help consumers understand how financial decisions might impact their credit scores. Also uses FICO models for credit scoring.