Mistakes I made applying for my first credit card (avoid these)
If your school’s financial literacy teachings were similar to mine, you associate credit cards with the rapidly growing U.S. consumer debt. Early in my personal finance education, it was taught that credit cards create “bad debt” and should be avoided when possible. This is because of their exorbitant interest rates that can cripple even the wealthiest people financially. While true, credit card’s interest rates are high, what is seized to be taught is that credit cards are only as dangerous as the people using them. Many consumers lack a basic understanding of personal finance and rely too heavily on this primitive teaching style that makes credit cards appear to be dangerous; never learning that credit cards can be beneficial if used properly. This lapse in knowledge is why so many people are hesitant to apply for their first credit card. According to Motley Fool the average people get their first credit card is 20, and roughly 12% of people don’t get a credit card until they’re older than 25. But, that’s often much later than they should. I too fell victim to this. Had I spent more time educating myself on credits cards I could have avoided these mistakes when applying for my first card…
Mistake #1: Believing I don’t need one. Initially, I thought it’d be best if I never got a credit card, unless absolutely necessary. I was taught to buy things in cash or use debit cards to avoid racking up a credit card bill I couldn’t afford. This largely in part to some personal finance influencers who preach that there is a psychological benefit to using cash because you see the money leave your hand, unlike with credit cards. With this, I believed as long as I always used cash or debit I would never get into trouble with debt and spend less money. I never wanted to be one of the millions saddled by credit card debt, and the best way to guarantee that was to never have a credit card.
Why this is wrong: Credit cards are not what causes you to spend more money. They are a mechanism that holds you accountable when you do. A debit card and cash stop you from ‘overspending’ because you can’t exceed the money physically available. But, if you’re using all the money you have available as a guiding principle for your spending you’re going to run into a lot more financial challenges than credit card debt. To avoid debt you can create the same psychological connection people have to spending cash if you create a strict monthly budget based on your income, and hold yourself accountable to it. With a budget, regardless of how you choose to spend your money, cash, or credit, you can leave yourself in a secure financial disposition. Using credit cards with your budget is an added bonus because credit cards are the fastest and easiest way to build your credit score. It’s important to build your credit score because without a strong credit score it is difficult to be approved for good mortgage rates, better loan rates, or any other long-term purchase that requires a loan. Credit cards are the first step you take to becoming a ‘credible’ debt borrower. They prove that you can handle your finances and make you a more trustworthy borrower when you need money for larger purchases.
Mistake #2: I’ll apply when I have more money. Even after I realized at some point, I should get a credit card to start building my credit score I still wasn’t ready to get one. I thought it’d be best to get a credit card when I was making more money. My understanding was that in order to get approved for a credit card you would need a steady source of income — that way creditors know you can make payments. I also thought a credit card would only be of value if I was regularly putting purchases on it. Otherwise, how would lenders know I am really credible? Being in college at the time, I decided to wait until I finished and had a full-time job with a steady source of income.
Why this is wrong: The amount of money you plan on spending with a credit card should have no bearing on when you apply for one. In fact, when you’re only making a little bit of money, working part-time in school, or just early in your professional life l is the best time to get a credit card. Generally, earlier in life, it’s easier to control your spending because you have minimal expenses, and you only make a few purchases a month. This means you are in a better position to keep your utilization low. If you’re unfamiliar, credit utilization is the amount of money you spend divided by the total credit limit you have. For example, if you have a credit limit of $1000 and you spend $100 in a month that would put your utilization at 10%. The lower your utilization is, granted you make payments in full on-time, the better your score will be. Therefore, during the years when you have lower expenses, you give yourself time to build your score with positive marks in utilization.
Mistake #3: Suffering from analysis paralysis. After I was finally beginning to understand that a credit card has value, no matter your income, I wanted to get the most out of one possible. I watched countless videos (shoutout to Graham Stephan) on the best beginner credit cards and did about as much research on each card as you can. I would go back and forth between the value of a signup bonus or cashback trying to determine which one had the greatest perks. It took months for me to make a decision, and every time I thought I had reached one I would find a reason to go with a different card. I realized this was a big decision and wanted to be absolutely sure the card I got was the right one for me. After months of debate, I ultimately landed on the Discover It card (use my referral link here to get a $50 sign up bonus when you apply), and while it was a great decision it took way longer than it should have — which has hindered my ability to grow my credit score.
Why this is wrong: It’s not wrong that I spent time researching which card to get — it’s important to do before you apply for a card. However, I took months to make a decision. By doing this I missed out on several months that I could have been building my credit score. One of the 6 main pillars of your credit score is based on the time you’ve held accounts. The longer a history you have, the better your score. It is advantageous to get a card as early as possible — instead of spending months nitpicking on the decision. This is especially important to understand considering there are really only a few options you have early in your credit journey. As long as you go for a no annual fee card that you have high approval odds for, you’ll be fine. The principle of just having a card and building your history is more important than the benefits early in your journey.
Above all else, it’s important to understand credit cards aren’t dangerous; consumers are. When you first begin your credit journey, it’s intimidating because credit cards are taught as something that’s dangerous. No one wants to be saddled with credit card debt or mismanage their finances; I get it. But, that will only happen if you don’t take the time to educate yourself on the way credit cards work. Generally, they can be a great tool; not only for the cashback and other perks they provide but further down the road they can help you get lower interest rates and greater approval odds for loans.
To enhance the likelihood you avoid the same mistakes I did — find a no annual fee card for beginners and just apply for it. The Discover It card is a great option for beginners, as well as the Capital One Platinum Card, amongst others. Regardless of which one you choose, put a few expenses on it each month and always pay your balance in full on time. This will give you a strong foundation to build your credit score.
Getting a credit card shouldn’t be something people avoid or are afraid of. It should be something they’re eager to do. The mistakes I made were not catastrophic to my credit journey, but they certainly haven’t made it easier. Regardless of if you’re 30 or 18, if you’re early in your credit journey these are easy misconceptions you can avoid that will help you in the long run of your credit building journey
