When I got my first credit card at age 18, I knew very little about credit. I knew I needed to make my payments on time, but I didn't know what a credit score was, how important it was to keep my balance low, or how costly -- both financially and credit-wise -- a late payment was.
Fortunately, everything turned out OK for me.
Sadly, this isn't the case for many Americans.
In November 2015, Credit Karma partnered with research company Qualtrics and found that new-to-credit Americans frequently make Credit Fumbles (either hurting their credit or racking up a ton of debt) before their 30s and spend years recovering from their mistakes. In fact, a whopping 68 percent of survey respondents reported making one or more major financial mistakes before turning 30.
At Credit Karma, our goal is to help consumers avoid these Credit Fumbles. 73 percent of survey respondents said better financial education could have prevented them from making Credit Fumbles, so before you apply for your first credit card, check out this guide to using credit cards responsibly and assess whether you're ready for the responsibility.
1. Know your score.
While 75 percent of Americans had a credit card by their 24th birthday, 69 percent didn't understand what credit scores were when they got their first card. This is scary because credit scores and credit cards are closely intertwined -- your credit score can impact whether you're approved for a card, and how you use your card could make or break your credit score.
It's important to know your credit score before you apply for a card because doing so can help you determine which cards are best for you. If you've never had any form of credit, for example, you may not have a credit score and may want to apply for a secured credit card, which requires a cash deposit, or student card, which is targeted toward young cardholders. Keep an eye out for high interest rates and fees.
On the other hand, if you've made regular, on-time student loan payments or you're an authorized user on someone's card that's in good standing, your credit score may qualify you for a larger variety of credit cards -- maybe even some that come with rewards.
Because applying for a credit card typically results in a hard inquiry that can lower your score, it's prudent to only apply for a card you think you have a good chance at being approved for. Instead of blindly applying for any card that looks appealing, learn more about your chances by logging into your Credit Karma account and checking your Approval Odds.
2. Know credit terminology.
Do you know what an APR is? What about a balance transfer? Or a cash advance?
It's important to know what you're getting yourself into before applying for a card to minimize your chances of running into issues down the road. Take some time to make sure you understand your rights, how much you could pay in interest and what'll happen if you make a late payment.
Don't know where to begin? The Consumer Financial Protection Bureau (CFPB) has a lot of great resources that can help simplify things for you. We recommend checking out their sample credit card agreement to better understand any agreements you may encounter in the future and their glossary of important credit card terms to familiarize yourself with common credit language.
3. Know how to use credit cards responsibly.
Credit cards can be extremely useful tools, but they can also lead to debt if not used properly -- according to our survey, more than half of young adults racked up debt on their credit cards that they were unable to pay off within the year. Here are some responsible habits that, if adopted, could help minimize future Credit Fumbles:
- Try not to rack up a high balance. In addition to being dangerous to your wallet, keeping a high balance could end up hurting your credit. "A common myth among consumers is the belief that it's OK to max out your credit card," says Bethy Hardeman, chief consumer advocate at Credit Karma. "However, your credit utilization -- the amount of debt on your credit cards divided by the total of all your credit limits -- is one of the biggest factors of your credit score." She recommends keeping your credit utilization below 30 percent and budgeting to keep from overspending.
- Pay off your balance in full each month if you can. You don't need to carry a balance from month to month to build credit. If you aren't able to pay off your cards in full each month, at least try to pay more than the minimum. The faster you eliminate your balance, the less you'll pay in interest.
- Avoid late payments at all costs. Just one late payment could drastically hurt your credit score as well as expose you to late fees and/or penalty APRs, so know your payment due date and consider enrolling in autopay or setting up reminders to make your payment each month.
- Shop safely. There are countless scams out there, and data breaches occur regularly. To help combat fraud, only use your credit card to shop at secure sites, and don't use public Wi-Fi to shop or pay your bills. While you may not be liable for fraudulent purchases made with your credit card, dealing with identity theft is a hassle, so you'll want to take proactive steps to protect your credit.
In the end, knowing your own needs and limits is the most important thing before getting a credit card. Honestly ask yourself: "Am I ready for the responsibility?"
By being responsible and educating yourself, you can avoid making common credit mistakes and use credit to your own benefit.
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Advertiser Disclosure: We think it's important for you to understand how we make money. It's pretty simple, actually. The offers for financial products you see on our platform come from companies who pay us. The money we make helps us give you access to free credit scores and reports and helps us create our other great tools and educational materials.
Compensation may factor into how and where products appear on our platform (and in what order). But since we generally make money when you find an offer you like and get, we try to show you offers we think are a good match for you. That's why we provide features like your Approval Odds and savings estimates.
Of course, the offers on our platform don't represent all financial products out there, but our goal is to show you as many great options as we can.