The rising costs of daily expenses, such as food, gas and housing, have directly affected young people and recent college graduates interested in applying for their first credit card.
There are many reasons why you may feel reluctant to get your first credit card, including rising inflation and possible financial risks. But by getting a credit card now, you are getting in a position to have more control over your future finances while getting rewards, sign-up bonuses, and great benefits for members.
What are some of the benefits of getting your first credit card?
Rising prices can make it tempting to wait until you have more money, a better job, or an improved living situation, before you get your first credit card. But there are some notable advantages to getting your first credit card sooner rather than later. Having a credit card can help you:
Learn how to manage your finances
One of the biggest fears about getting a credit card is accumulating debts and not being able to pay them. However, if you are careful with your spending habits, a credit card can be a great way to teach you how to make a proper budget. You’ll learn how much money you need each month and how much to set aside for unexpected expenses, such as car repairs or medical bills.
Build your credit history
Credit cards also help build a credit history, which can help you establish a good financial reputation early in your life. Your FICO score is calculated by several factors, including how long you have a good payment history and whether or not you have late payments on your report. Having a credit card from the beginning can help increase this part of your score, so that when you apply for a mortgage or car loan in the future, lenders see that you were responsible and are likely to continue paying your bills on time. .
Earn rewards on purchases
Credit cards usually include a rewards program that returns your money or other perks for using them for shopping. Some even offer miles or points that can be exchanged for travel or merchandise.
Cash back rewards are one of the most popular incentives credit cards offer. Many cash back reward cards have no annual fee and provide a percentage of cash back on every purchase made with your card. For example, if you spend $ 2,500 and you can earn a 5% cash refund, you can earn up to $ 125 in cash rewards (assuming there are no other fees).
If you pay off your balance each month and avoid exceeding your approved credit limit, those rewards can add up to and be worth hundreds or even thousands of dollars each year, depending on your spending.
Handle emergency situations
With a credit card, you have a safety net so that when things go wrong, such as unemployment or a medical emergency, there is always some money available, even if it means charging something as small as $ 15 to make a payment up to the day of payment arrives.
What Are Some Disadvantages Of Getting Your First Credit Card?
While there are great benefits to getting your first credit card in 2022, there are also possible concerns. These include:
Some credit cards do not charge an annual fee, but for cards with high-end benefits, that fee can exceed $ 50 each year. Instead, you can try betting $ 0 annual fee cards, but if you win big rewards on purchases, you can easily recoup what you spend on the annual fee.
But in addition to the annual fee, there may be other fees to consider, such as foreign transaction fees, balance transfer fees, or late payment fees. Therefore, it is important to read the fine print before ordering one.
Rising interest rates
The biggest downside to getting your first credit card at this point in history is that interest rates are currently rising. This trend has been occurring since early 2021 and shows no signs of slowing down. This could make it difficult for those who do not have a credit history to get a decent credit limit or to be approved for a new card. Also, if you end up carrying a balance, high interest rates could account for a large portion of your monthly expenses.
But despite the higher rates, you can still benefit greatly from getting your first credit card, taking advantage of the benefits and rewards, if you manage your credit card balance responsibly.
Possibility of losing payments and accumulating debts
If you use your credit card too often and don’t pay your balance every month, you may end up with a lot of debt and a lot of interest over time. In fact, according to the Federal Reserve Bank of New York, Americans owed nearly $ 841 million on their credit cards as of the first quarter of 2022.
This means that even if you make all payments on time, interest will continue to decrease on your available credit if you do not pay the full bill each month. And if your interest rate is high (which is why it’s important to find a low-interest card), exceeding your credit limit can put your account in default. If this happens, it will appear on your credit report and have a negative impact on your credit score.
How to know when is the right time to apply for your first credit card
If you’re starting out as a young adult and still don’t have a lot of income, you may think it’s best to wait before you get your first credit card. However, if you have earned at least a part-time job, a scholarship or a steady stream of income, or have already established yourself in your career and can afford to carry a balance, then this is a good time to get your first credit card. . Just do your homework, understand interest rates and rates, and choose a card that fits your financial goals.
What to do when you use your first credit card
- Pay balances each month to avoid interest charges and fines. Some cards charge an annual fee and higher interest rates for people with limited credit history or high balances. If you only pay the minimum required balance each month, interest charges will exceed the rewards you get on your purchases (unless you are receiving a cash refund or a particularly high mileage / points bonus).
- Note changes in interest rates and rates with the cards you consider. Many rewards credit cards offer introductory APRs of 0 percent on balance transfers or new purchases, but these may be accompanied by conditions. The 0 percent APR period usually ends after 12 to 21 months and the regular rate suddenly goes into any remaining balance at that time, sometimes up to 20 percent. Therefore, if you plan to transfer a large balance to one of these cards, do so only if you can pay the entire balance before the introductory fee expires.
- Build an emergency fund that covers at least three or six months of spending. While it’s true that the cost of borrowing is higher than in years past, you can still overcome market changes by creating an emergency fund and being smart about how much you charge on your card each month. (High utilization rates can lead to higher interest rates on both savings and credit cards).
What to avoid when using your first credit card
- Avoid using your credit card for cash advances to cover emergencies or unexpected expenses. A cash advance is when you use your credit card to get money from the bank, usually through an ATM or check-in service. Cash advances have higher rates and interest rates than regular purchases, so they will cost you more in the long run.
- Avoid delays in credit card payments by setting up different payment options that work for you. Missing payments can damage your credit score so badly that it takes years to recover from the damage. To avoid this, set up automatic payments so that the balance is paid in full on the due date of each month. If automatic withdrawals are not available through your bank or credit union, consider setting up an online bill payment service with another institution that offers this service directly through your website or application, such as Prism.
- Avoid making major credit changes before applying for a loan like refinancing or closing a credit card account. When applying for a loan, lenders will analyze all of your current assets and liabilities as part of your decision-making process. It is best to keep all your old accounts open until the application is submitted and approved. Even if they have high balances, they still help build a good credit history and may be worth keeping for the time being.
The starting point
Developing good financial habits is important. Even if you are worried about current financial challenges, getting your first credit card in 2022 can be very beneficial for you.
If you avoid spending more money than you have, pay your bills on time, and keep your balance low, you’ll be much more prepared when it comes time to buy your first home or car. No matter how good the economy is when you finally decide to take the plunge, the right credit card can be a useful tool to improve your credit, manage your day-to-day finances, and get one step closer to your financial goals.