Credit cards: Good or evil?
Whether you’ve shunned credit cards in the past for fear of diving into a debt oblivion or you can’t wait to score some sweet plastic freedom — and the accompanying perks — deciding to get your first credit card is a big decision.
Or at least, it should be, according to Todd Christensen, an Accredited Financial Counselor and education manager with MoneyFit.org.
“I always recommend people understand they need to be ready for credit before they just go out and apply,” he said. “I’m not a fan of credit for credit’s sake.”
The Credit Card Accountability Responsibility and Disclosure (CARD) Act Act of 2009 was supposed to help reduce the number of young people getting credit cards the second they hit the college bookstore by making it harder for consumers under the age of 21 from getting credit cards.
However, if you can prove your ability to pay — and that income can include scholarships and grants — it’s still possible to get a credit card at the age of 18. And there are plenty of cards that are marketed specifically to college students, who may or may not be ready for a card.
Of those college students with credit cards, 36% already have more than $1,000 in credit card debt, according to an EVERFI and AIG survey of more than 30,000 college students from across the country.
“For really young people who don’t have the discipline or haven’t built the discipline yet, it is better to have no credit than to have really bad credit,” Christensen said.
But for those trying to build credit, whether to buy a house or even rent an apartment, a credit card can be the first chance to establish a history. So how do you know if you’re ready for your first credit card?
Should I Get a Credit Card?
The most important question you need to answer is whether you even need a credit card.
Just because you hit a milestone age or event doesn’t mean it’s automatically time to apply, according to Christensen. In fact, the best reason to get a first card is as a means for reaching a bigger goal.
The average Annual Percentage Rate (the yearly fee you pay for borrowing money) is 16.91%, according to the latest Federal Reserve Consumer Credit Report.
“Credit tends to be overemphasized for young people whether it’s by their parents or by their peers,” he said. “A first credit card is really meant to be a way of starting down the road of building credit with an idea of making a major purchase on credit.”
If you’re not sure whether you’re ready to handle the power of plastic, here are four questions to determine if you’re ready for your first credit card.
1. Do You Have a Good Reason for Wanting a Credit Card?
Ask yourself why it is you want a credit card.
If it’s to establish a history for future employment or to raise your credit score, you’re proving your financial maturity, Christensen explained. If there isn’t a reason in the here and now, think further down the road.
“Don’t worry about building credit until you’re about two years away from making a major purchase,” he said. “And for me, that is buying a home.”
However, if your reasons include racking up credit card rewards or wanting the convenience to snag deals on items you can’t yet afford, you are setting yourself up for failure, according to Christensen, who speaks from experience.
“I was 21, 22 when I got my first credit card, and I was not ready,” he said. “I maxed it out — a $2,000 credit card — in 36 hours. I bought a professional grade keyboard and two studio monitors.
“I was in credit card debt for almost 10 years.”
2. Do You Have Proof You’re Ready to Handle Credit?
Instead of applying for the card with the hopes that you’ll be able to manage your money, reverse those steps, Christensen advised, who offered the following minimum criteria before you apply for your first card:
Build a three-month emergency savings fund. “If you don’t have that savings fund before you get a credit card, you’re likely never going to have one,” Christensen said.
Have a regular income for 12 months. Either a part-time or full-time job is acceptable, according to Christensen.
Create a written budget. You can find ideas for creating a budget here.
Use a debit card for 12 consecutive months without having a purchase denied. Although a debit card doesn’t help you establish a credit history, it’s a great way to gauge your self control when there’s a card in your wallet.
3. Have You Done Your Research?
How well do you understand credit cards? If your financial literacy is lacking, you could end up paying for it — with interest. (Sorry, just a little financial humor.)
Understanding the basics about how credit cards work is essential, including knowing the myths about credit.
“If you think that carrying a balance on a credit card is normal, you are not ready for a credit card,” Christensen said.
Beyond that, you should also investigate a card’s terms, conditions and fees before jumping at the first offer.
If you think that carrying a balance on a credit card is normal, you are not ready for a credit card. — Todd Christensen with MoneyFit.org
“If you don’t even know what the typical rate is on a credit card, you’re going to end up with a very high-interest rate credit card,” Christensen said. “Do some research and shop around.”
By comparing credit card features like interest rates, annual fees, credit limits, penalties and rewards, you can decide what is the best card for your needs at this point in your financial life.
4. Can You Get Approved for a Credit Card?
This might seem like the first question to ask when deciding if you should get a credit card, but addressing the prior three will help make this one easier to answer.
You’ll need to gather all your relevant financial information, including your annual income, employment information and your credit score, which you can track through credit-monitoring sites like Credit Sesame (check out our Credit Sesame review here).
Apply online and you could be notified within a few minutes that you’ve been approved — or receive word that the lender needs more info. Upon approval, you’ll find out your credit limit and APR.
Even if you have credit mistakes in your past — or no credit history — you still have options, including applying for a secured credit card.
With some preparation and a little patience, a credit card can be the beginning of a beautiful credit history. Or something like that.
Tiffany Wendeln Connors is a staff writer at The Penny Hoarder. Read her bio and other work here, then catch her on Twitter @TiffanyWendeln.