If you are looking for first time credit cards you may find that your options are limited depending on several factors. However, there are good credit card options if you know what to look for.
In this interview, Curtis Arnold, a nationally recognized consumer educator and CEO of CardRatings.com, a credit card consumer education website, gives his insight into what consumers should look for and expect with first time credit cards.
What does a person need to get their first credit card?
I am frequently amazed that college students and young adults still don't know what an APR is. When you are new to credit you don't have to understand everything about credit and personal finance, but it is important to know the basics and understand the importance of a credit score.
How important is a credit score?
Very important. So many people don't understand the implications of a good credit score in today's financial market. The credit card legislation passed in 2009 is going to make it even harder to establish credit going forward because credit card issuers are tightening their rules as to whom they are going to issue a credit card. If you are new to credit and don't have an established credit score, you are going to be lumped into the tightened credit market which will make it harder for you to get a credit card. You will not have the same options for credit cards that you might have had several years ago.
Get your credit score before you apply for credit. It will cost you from $10 to $15. Then use your new credit card for 18 months and get your credit score again. You should be in average credit range which is from about 600 to 720 in 2009. Be sure to educate yourself about what is involved in getting and building a credit score. If you use credit responsibly, your scores are bound to improve.
This is a really dynamic changing credit environment. At CardRatings.com we are bullish on secured credit cards from the consumer standpoint. We think there will be an increase in offers for secured credit cards.
What is the advantage of a secured credit card for someone who is new to credit?
If you are new to credit you need to build up your credit history. It takes about 18 months to build a credit history. You need to show a history of careful credit use and timely payments. A secured card is typically easier to obtain and it is an excellent way to build your credit.
Historically, the sad part is that secured credit cards have had a stigma. There has been a common misunderstanding that a secured card is going to look bad on your credit history. This is ironic because a secured card can help you build your credit history since your payment history is reported to the credit bureaus. The only fundamental difference between an unsecured credit card and a secured credit card is that you put up a security deposit with a secured credit card. This security deposit is used as the collateral for the credit line. Only you and the credit card issuer will know that it is a secured card.
Prepaid credit cards are also an option for new credit card users; however, they usually won't help you build a credit history because they may only report the monthly fee and not the payment history.
What should you look for in a secured credit card?
All secured credit cards are not created equally. Here are some key things to look for:
- Reasonable Annual Fee - Typically a secured credit card does have an annual fee. A nominal fee of $20 to $40 is reasonable.
- Interest Rate - Secured credit cards typically are going to have higher interest rates than unsecured credit cards because they are marketed to individuals who don't have long credit histories and who may be a higher credit risk for the card issuer. Look for interest rates in the mid to upper teens. Don't pay over 18 or 19 percent. Be sure to:
- Look at the package deal of the annual fee and the interest rate; a 13 percent interest rate with a $200 annual fee is not an attractive deal.
- Remember that you only pay interest if you carry a balance and you don't need to carry a balance to build credit. You need to show payments.
- Grace Periods - A secured card with no grace period is a very poor choice since you will end up paying interest on balances which you had planned to pay off immediately. Be sure you read the terms and conditions so that you don't unexpectedly apply for a secured card with a very short or no grace period.
- Reporting to Credit Bureaus - Look for a secured card that reports payment activity to all three credit bureaus every month. Only reporting the fees you pay is not enough to help you build credit.
- Interest on Deposit - A secured credit card usually requires at least a $250 minimum deposit. Earning interest on your deposit is a nice plus.
In addition to features, there are also several sales approaches for that you should look out for. You should avoid:
- Card issuers who want money up front for an unsecured credit card.
- Secured or unsecured credit cards that are advertised as 100 percent approved. Only a prepaid credit card can be 100 percent approved.
- Cards that require you to be an authorized user on someone else's account.
What are the options for students who want a credit card?
Options for cardholders under the age of 21 will be hampered after February 2010. If a person under the age of 21 does not have their own income, their parents will need to cosign for any credit card. If students want to establish their own credit, they can do so by using a secured credit card.
What features should a first time credit seeker look for?
First time cardholders should not get their hopes up on getting a credit card with a rebate or cash reward program. First time cardholders should focus on building their credit history. This will give them a better credit score which will, in turn, make them eligible for credit cards with rebate programs and other perks. They won't get free airline tickets but they will receive a card with basic credit card features such as:
- The ability to dispute a merchant charge
- A grace period before interest is charged
- Rental car insurance
- Free travel and accident insurance
Which cards are particularly good for first time credit cardholders?
There are several good credit cards out there for first time cardholders including the Citibank secured card and the Orchard Bank card. Be careful about going with a credit card or credit card issuer that is new to you. Check it out. You can use websites like ours where we rate the available cards. Cardholder forums on sites such as ours are also great sources of reviews by other cardholders.
About Curtis Arnold
Curtis is the author of How You Can Profit from Credit Cards: Using Credit to Improve Your Financial Life and Bottom Line which can be purchased at bookstores nationwide and online at various retailers including amazon.com. He is a frequent contributor on national morning shows such as The Today Show and Good Morning America and to newspapers including The Wall Street Journal and The New York Times.
For More Information on First Time Credit Cards
LoveToKnow Credit Cards has more information on selecting and managing first time credit cards including:
- Quiz: What is a Good Credit Score?
- Bad Credit Cards
- Secured Small Business Credit Cards
- Secured Credit Card Ratings
A review copy of Person-to-Person Lending was provided by Curtis Arnold for this article.