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Four key things to know before getting your first credit card

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    Are you ready to apply for a credit card but aren't too sure where to start? You're in the right place. Having a credit card can be beneficial when used correctly, so it's key to do your research before choosing the right one and applying.

    Four key things to know before getting your first credit card include:

    • Knowing what credit is and how it works
    • Understanding how a credit card can help you build credit
    • Establishing what you should know about your credit history
    • Understanding key terms when researching cards

    1. What is credit and how does it work?

    If you're looking to learn more about credit cards before applying for one, let's start with defining credit itself. We all hear it, but do we really know what the term means?

    In simplest terms, credit is the ability to borrow money and make purchases under an agreement. Within this contractual agreement, you're required to pay back the amount at a particular time. The borrower receives money from an institution, usually a bank, with an agreement to pay the money back. This money will typically carry interest which will need to be paid. This is the cost of borrowing from the institution.

    Credit is commonly mentioned when referring to your credit history — a standing record of your credit usage. Lenders examine your credit history, as well as several other factors, to determine whether you're eligible for different types of loans. Some examples of these loans may be a mortgage, auto loan or credit card. The higher your credit score, the better your terms may be for these services. If you want to improve your chances of getting approved, you'll want to have a good credit history.

    Building and having good credit is a key part of establishing your financial security. Credit is important not only when it comes to getting approved for a loan, but also when it comes to finding a job, an apartment, getting a car and more.

    2. How does a credit card help me build credit?

    Credit cards can be one of the most powerful financial tools when it comes to building your credit. But how does it help you build credit?

    Using a credit card regularly, making payments on time and keeping a low credit utilization can show that you're capable of managing your credit on a regular basis. Simply having an open account can help you build credit. This is because the length of your credit history is one of the factors used to calculate your credit score. Credit card issuers will report your account and activity to the credit bureaus (Experian™, TransUnion® and Equifax®), where your credit report is using your information.

    To build your credit with a credit card, you'll need to open an account of your own or become an authorized user on someone else's card. Some ways to build credit include:

    • Make purchases and pay on time: Showing creditors that you're capable of handling debt and showing that you can make payments on time is an essential part of building credit. Making purchases and paying off your balance every month is a good way to increase your credit score. It's a good idea to pay as soon as you receive your statement, so you don't have to worry about missing your due date or incurring interest or fees. Your payment history makes up a significant percentage of your credit score, so paying on time is one of the best ways to build your credit.
    • Become an authorized user: Whether you're too young to get a credit card of your own or you just haven't had any luck in doing so, you can become an authorized user. An authorized user is permitted to use another person's credit card, as long as the cardmember signed off on it. The authorized user gets a card in their name that's linked to the original cardmember's account. You don't need any credit to become an authorized user, but you can start to build a positive credit history once the bank sees that payments are being made. Keep in mind, not all credit card issuers report authorized user activity, which may not help build credit in this case.
    • Get a co-signer: If you're trying to increase your chances of approval for a credit card when you don't have the best credit, you can have an individual cosign for you. This cosigner will need to have established strong credit to help you. Keep in mind that any missed payments on your part will also impact the credit score of the cosigner. Not all credit card issuers offer cosigners.

    3. What to know about your credit history

    Along with credit comes your credit history. This measures your ability to repay debts and how responsible you are when it comes to paying them off on time. Your credit history is recorded in your credit report, which will show how many and what type of credit accounts you have open, the duration of the accounts, amounts owed, the amount of available credit used, if your payments are on time and the number of inquiries. It'll also contain information about any bankruptcies, collections and more.

    You have access to your credit history through a credit report and are eligible for one free report from each credit bureau on an annual basis. You may not have much credit history if you're just starting out. The sooner you start to build credit and credit history, the sooner you'll become more financially secure.

    The information in your credit history is used by potential creditors to decide whether they should extend credit to you and is also used to calculate your credit score. Having a good credit history may make it easier to get credit cards and can make you look like a responsible card member.

    4. Helpful terms to know

    When starting the process of applying for your first credit card, it helps to study the lingo that comes along with it. Here are some common credit card related terms you may run into and what they mean:

    Annual fee

    An annual fee is like a yearly membership — a charge assessed on some business and consumer card accounts for keeping an account open. The fee helps cover the cost of delivering services and benefits.

    Annual percentage rate (Purchase APR)

    The annual percentage rate (APR), indicated in your cardmember agreement, is the rate of interest charged to your account annually for purchase transactions. It's also referred to as the Purchase APR. Your APR helps calculate the interest charges assessed on the outstanding purchase balance on your account.

    Credit limit

    A credit limit or credit access line designates the maximum amount of money the card issuer has agreed to loan to you at any one time. If your balance exceeds the limit, this is referred to as being over-limit.

    Interest charges

    Interest charges refer to one type of finance charge, which accrue on an account because of a revolving balance that is subject to an interest rate. Interest charges are the amount assessed for allowing you to pay a portion of the balance, rather than pay the account in full immediately.

    Different interest rates may be applied to your account depending on the type of transactions made. Some interest charges may begin to accumulate starting the day the transaction is made.

    Late fee

    If you're behind on a payment, you may receive a fee for your bill being late or if you pay less than the minimum payment.

    Minimum payment

    The minimum payment due is the minimum amount that must be paid to keep your account current. If you make only the minimum payment each period, you'll pay more in interest, and it'll take you longer to pay off your balance.

    Payment due date

    Payments are due on the date shown on your monthly billing statement. Your payment must be received by your credit card company on this date to avoid being past due. Missing your payment due date can result in fees and can hurt your credit score.


    Your billing statement is a document generated each month during which there is a balance and/or activity on your account. The statement itemizes the activity (e.g., purchases, fees, interest and payments) which occurred on the account during the billing cycle. The statement also indicates your new balance, minimum payment due and payment due date.

    On the back of the statement is a description of interest charge calculations, a summarized description of certain account terms, including your billing rights.

    Now that you know the four things you need to know before opening your first credit card, you can explore different options and find the best one for your needs.

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