How do I get a credit card?

Most financial institutions (banks) will offer a variety of credit cards. There are also private companies that specialize in more specific credit card programs. In general, you would reach out to the institution or company to inquire about a credit card. They will use information about you including your credit score (see below) to determine your financial risk. From there, you will be approved or declined a credit card based on those factors. Your credit score, income, and other factors will also determine how much credit you will be allowed at a time. This could range from $500 to hundreds of thousands, for example.

What’s a credit score?

This is a great question and one that many people don’t completely understand. A credit score (or Fair Issac Corporation, “FICO” score) is a three-digit number tied to individuals who have opened at least one line of credit; typically, a credit card or loan.

The score itself will range between 300-850 per individual and is based off your:

  • Timeliness of making payments – are you paying your minimums on time?
  • Available credit balance – how much credit is available to you
  • Credit mix – revolving debt (credit cards) and/or installment debt (loans, etc.)
  • Length of your credit history – how long you’ve had a credit card or loan
  • New credit – are you applying for new credit often?

Generally, you need six months of owning a credit card or having credit (through a student loan, for example) to obtain a credit score.

Broken down, here are how the big three credit bureaus (Equifax, Experian, TransUnion) would rate credit score.

  • 800-850 = Exceptional
  • 740-799 = Very Good
  • 670-739 = Good
  • 580-669 = Fair
  • 300-579 = Very Poor

Each of the big three credit bureaus may give you a different score and some lenders or institutions favor one over others. In general, the higher your credit score, the more likely financial institutions and lenders are to lend you money via a loan or credit card at a lower interest rate because you are less of a risk to them. They know you can pay back the debt owed to them efficiently and in full. Lower credit scores are looked at as riskier because of how the scores are calculated and often result in either a denial of credit or loans, or a higher interest rate to make up for the risk.

What types of credit cards are there?

Get ready because there are likely many more types of credit cards than you previously imagined.

There are many different types of credit cards, but the most common types include:

  1. Secured credit cards
  2. Standard unsecured credit cards
  3. Travel rewards credit cards
  4. Credit cards for students
  5. No annual fee credit cards
  6. Business Credit cards
  7. Charge cards
  8. Store credit cards

Each of these have different application requirements and from a value standpoint will vary from person to person.

Super quickly, a secured credit card requires an upfront deposit that protects the card holder. Often this deposit becomes your credit limit. From a risk perspective, this ensures that the credit card company won’t be out any money if you aren’t able to pay off your balance. An unsecured credit card means that you don’t pay an initial deposit to open the card/account.

How do I figure out which one is right for me?

This is the million-dollar question, and the answer is of course, it depends.

There are many credit cards that offer perks like cash-back, travel rewards, or initial rewards bonuses. So, let’s give a couple examples. Let’s say you’re an avid traveler who has some liquidity (meaning you have a good amount of money left over each month after paying off your expenses and debts). You may opt for a credit card that earns you miles with each purchase that you can use on airfare in the future rather than paying cash out of pocket. On the other hand, maybe you’re not looking to travel just yet, are in school, and barely making it by month to month. You would likely do better with a student credit card with a lower APR (Annual Percentage Rate) and lower spending limit that would keep you out of longer-term debt issues. It really depends on your financial position and interests at the end of the day.

What’s an APR?

Good timing! APR stands for Annual Percentage Rate. It is the percentage that credit companies and lenders charge on an annual basis, calculated off your balance. The most common ways you will see this is in the interest applied to your credit account during a billing cycle.

With a Variable APR (the most common credit card APR), you can calculate this by taking your daily rate (divide your credit card’s APR by 365) x average daily balance (add all the balances at the end of each day and divide by the number of days in that billing cycle) x days in billing cycle. That will get you your credit card APR.

A Fixed APR is a fixed rate that you can lock in for a designated period. Keep in mind that fixed rates can sometimes be higher than Variable APRs and can also change based on if you miss payments or your credit score decreases.

If you don’t plan to carry a balance with your credit cards (that should always be your goal), APR won’t impact you as they are based on balances you carry.

Who else can see my credit score?

Another great question. Individuals and entities who have access to your personal credit score are lenders, landlords, utilities, potential employers, and insurance companies. Each of these have a specific reason why they may want access to your credit information, but all get back to the same question of “what is level of risk I take on if lending/servicing/employing this individual?” The higher your credit score, the less risky you appear to these entities, and you may eliminate any need to pay additional fees that offset that risk.

How do I find my own credit card score?

There are a variety of companies that can do a credit report for you or obtain your credit score. A credit report is a statement that details your credit history. A credit score is the three-digit number we mentioned at the beginning of this article. Some loans, financial institutions, and employers will provide annual credit reports to their customers or employees for free. If you’re looking for yours without these resources, you can find more information by visiting the Consumer Financial Protection Bureau (CFPB) website.

Should I pay my entire balance each month? Should I only pay the minimum?

Ideally, each month you should pay off your balance so that you have a better ratio of debt to available credit. The minimum balance is truly the “bare-minimum” that you should pay each month to stay in good standing. Not to mention that if you decide not to pay it off in full, you will begin accumulating interest likely as well. That total balance will keep ticking upward!

How do I build credit?

You build credit by paying your debts on time or in full over a period of time. Building credit takes time and discipline. Despite what you may think, having debt can be a good thing. Some debt is looked at more favorably than others! A few debts that are often considered better for your credit would be a mortgage, student loans, and car loans generally. This is because each of them can positively impact your financial position and potentially provide a return on your investment. “Bad debt” would be more often considered credit cards or high-interest loans that are difficult to repay. Now, if you’re paying off your credit card in full each month, that can actually help your credit score, too. The key is to pay on time and be aware of what you can afford to pay off ultimately. Don’t overspend.

What happens if I miss a monthly payment on my credit card?

It depends. Every institution or loan may have specific terms for missed payments and it’s important to familiarize yourself with them before you sign up for a card, loan, or otherwise. Regardless, this does not positively impact your credit and over time can really hurt it.

Can I get a credit card if I have no credit?

Yes, you can. The options for which are available to you may vary though. You may need to start out with a card that is designated a “student credit card” or another introductory card with a higher APR due to your risk profile. But generally, there is a card out there for everyone. Just be sure to understand the minimums and APR you’ll be repaying for that card itself. If you are living paycheck-to-paycheck, a credit card may not be a great option for you just yet.

Why do we have “Credit.” Where does it come from?

Credit is, in other words, your buying or financial power. It’s your promise to pay back a balance from an institution, individual, or other entity. The history of credit dates back thousands of years. It has often been originally linked to farmers. As a farmer’s crops took time to grow, they would need to take out credit from the sellers for the initial seeds they would plant and pay them back plus interest when the harvest was complete, and they had cashflow from the sale of their crops.

Disclaimer: Avenica is not a financial institution or personal finance expert. The information above is for informational purposes only and should not be seen as financial guidance. You should always seek additional information from a financial professional before opening a credit card or taking on any level of debt.

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