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Beginner’s Guide to Credit Cards
Once you decide you're ready for your first credit card, there are a few things you need to know first. The most important rule of having a credit card is to pay your bills in full and on time every single month. Credit card companies make a fortune off of people who struggle to make their payments in a timely manner. But, when used properly, they can be powerful tools in helping you build your credit score for years to come, all while earning you money and rewards.
Get Your Credit Score
Before you start signing up for credits cards all over the place, you'll need to know your credit score, along with any credit issues you may have already. Luckily, this information can be obtained easily and, better yet, for free. I'd personally recommend using Credit Karma, but a quick Google search will bring up a variety of sites offering free credit scores and reports. Most of these sites will give you a breakdown of your credit history and insight into your current credit standing, and may even offer information on utilization ratios, credit inquiries, age of credit history, and additional factors that comprise your overall scores.
Once you've got an idea of where you stand in terms of your credit score, you can start to make informed decisions on what credit cards you should apply for. A good credit score generally sits above the 650 mark, very good starts around 740 and an excellent score is anything from 800 and up.
Choosing Your First Credit Card
For someone will very little credit history or a not-so-stellar credit score, you'll want a card that will help build your credit. The Discover It card represents an excellent option for many first-time credit card holders. Discover It requires "good to fair" credit and offers some incredible cash back value by doubling all of the cash back you earn up until the end of your first year.
Discover It cardmembers earn 5% cash back (up to $1,500 each quarter) in certain "bonus" categories, like gas, restaurants and Amazon. And for all other purchases, members earn unlimited 1% cash back. The card also comes with free FICO credit score statements, offering you another layer in monitoring your score to ensure that it remains in good standing.
By starting with a low hassle credit card that has no annual fee and offers some pretty solid value with its generous cash back program, you've already taken a step in the right direction towards qualifying for some of the more lucrative credit cards.
Mid-Level Credit Cards That Make You Money
There are a couple credit cards on the market that require decent to good credit and can be a bit harder to qualify for, but that will offer a better value than the Discover It card. If you have some credit history and a score in the 600's or above, it may be worth applying for one of these cards. I'm talking about two credit cards in particular, offered by Chase and American Express: the Chase Freedom Unlimited and Amex EveryDay cards.
Chase Freedom Unlimited
The Chase Freedom Unlimited credit card is a spin-off from it's older brother, the Chase Freedom. The difference between the two cards is that the Chase Freedom caps cash back earnings at $1,500 in purchases per quarter, while the Chase Freedom Unlimited card offers unlimited cash back at a rate of 1.5%, which is a bit higher than the usual 1% rate. You also get a pretty generous signup bonus of $150 for making $500 in purchases within the first three months of opening your account.
Chase Unlimited also happens to have no annual fee, making it a pretty low hassle card. Plus, if you do happen to have trouble paying your card balance on time, you'll receive an introductory offer of 0% APR for 15 months on purchases and balance transfers. While that's a pretty sweet deal, I don't recommend making a habit of not paying your credit card statement balance on time and in full.
- Unlimited 1.5% cash back on every purchase - it's automatic
- Earn a $150 Bonus after you spend $500 on purchases in your first 3 months from account opening
- 0% Intro APR for 15 months from account opening on purchases and balance transfers, then a variable APR of 15.99-24.74%. Balance transfer fee is 5% of the amount transferred, $5 minimum
- Redeem for cash - any amount, anytime
- Cash Back rewards do not expire as long as your account is open
- No annual fee.
It's important to note that Chase generally doesn't like to approve applicants looking to sign up for their first credit card, so if you don't have much credit history, I suggest focusing on the Discover It card first and then gradually working your way up to this card.
Amex EveryDay Card
As we move towards credit cards that require a better credit score and credit history, the Amex EveryDay Credit Card by American Express makes the top of my list. This card remains quite attainable for beginners and offers some much better redemption options for your points than just utilizing them for cash back.
First up on the list of perks for this card is the 10,000 Membership Rewards points earned when you spend just $1,000 in your first three months. Additionally, you'll get 20% more points if you use your card 20 or more times each billing period. You'll also earn double points at grocery stores on up to $6,000 in purchases per year. As to where those Membership Rewards can be used, you have the option to pay off charges on your card or use them toward flights, hotels, and vacation or cruise bookings. Best of all, there's no annual fee and 0% intro APR on purchases and balance transfers for 12 months.
One of the key benefits of both the Chase Freedom Unlimited and Amex EveryDay cards for beginners specifically is that they have no annual fee. You won't feel pressured to use the card to justify a fee, and you have every incentive to keep it for several years in order to improve the average age of your credit history.
The Big Players
When it comes to taking full advantage of credit card rewards, you have to start slow. Sign up for one of the cards outlined above that fits your profile and start building your credit by paying bills on time and in full. As time progresses, you'll start seeing your credit score progressively increase and likely begin to notice more and more credit card solicitations in your mailbox. Stay disciplined and focus on being diligent about managing your credit card for at least one to two years.
Soon enough, you'll be ready to sign up for some of the big players in the market, like the Chase Sapphire Preferred, American Express Starwood Preferred Guest Card or Citi Prestige. These cards, while often requiring an annual fee, come with increased rewards, excellent signup bonuses and fantastic perks, like free nights in luxury hotels or special car rental privileges.
Building up your credit in a measured and responsible way with these cards not only benefits you in the short run through credit card rewards, it will also make your life so much easier when it comes time to apply for a car loan or mortgage. You're significantly more likely to not only secure a loan, but also lock in low-interest rates and save yourself a boatload of money in the long run.
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Images courtesy of Discover, Chase, AmericanExpress.
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