Americans have a love-hate relationship with their credit cards. One the one hand, they use them to pay for almost everything. On the other, they hate the 20 percent-plus interest rates.
Why does anyone need a credit card? After all, new technologies offer nearly free pay options – from smartphone apps like Apple Pay to money transfer platforms like PayPal, Venmo and Cash App. These all look like a much better deal than the 20 percent interest on many cards.
There are still important reasons to get a credit card. First, they offer actual credit, not just a way to transfer money you already have. Second, they allow users to build the credit profiles they will need later to secure mortgages and car loans.
Applying for a card can be really confusing. To provide some guidance, here are our answers to five common questions.
I got my first card after high school. My college had a deal with a bank to offer cards with low credit limits and high interest rates. While that wasn’t a great deal, at least the card was emblazoned with the school’s name and a picture of its mascot.
You need a certain emotional maturity, especially in terms of impulse control, to have a card and not run it up disastrously. If a person can manage a checking account with a debit card, it’s a sign that they will be able to manage a credit card without self-destructing, too.
Shop for the lowest interest rate. Many people do not understand that making the minimum payment on a card with a 20% interest rate will lead them to pay many times what they originally borrowed on the card. A low rate is much more important than gimmicks like “cash back” bonuses or frequent flyer miles. Banks offer those because they make a killing on the interest.
If you do not have a job, and have never had one, there is a good chance you will have to choose among unattractive cards. If necessary, accept a high-rate card, and charge a very small amount of money on it – say, $30 or so. Then, cut it up with scissors and throw it out. Make the monthly minimum payment for a year. After that, pay it off. You will have started building a credit record that will help you get a more attractive rate on a new card in a year.
A poor credit score is the main reason people get rejected, and poor scores come from not having a history of making responsible credit payments. It might be no fault of yours. You might just be starting out. One approach is to get a secured credit card. These do not check your credit. They require you to make a deposit, and the size of that deposit becomes your credit limit. These tend to have eye-popping interest rates, so if you go this route, take the same approach described in question four. That should give you the credit history you need to get a normal, unsecured card.