Your first credit card: 5 important things to know

Credit cards can be helpful tools once you know how to use them safely.

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Key takeaways

  • Read the contract with your card issuer so you understand the terms and check your credit reports regularly.
  • Treat your first credit card like a debit card—never charge more than you have in your bank account.
  • Use cards safely to minimize risk of credit card fraud and identity theft.

Getting your first credit card is an important financial milestone. Used wisely, credit cards can help raise your credit score, lower interest charges, and make purchases more convenient. But, used carelessly, they can lead to heavy financial burdens.

"Credit is an important tool in your financial toolbox if used wisely," explains Stefan Ross, vice president of credit card products at Fidelity. Responsible use of a credit card when you are younger sets you up for success in the future. The higher your credit score, the more likely you are to get approved and potentially pay lower interest rates when borrowing money for a home, car, or whatever you need. In the near term, you could also benefit from better car insurance rates, as well as a lower interest credit card. Most importantly, you'll establish personal habits that will help you achieve financial discipline and a reputation that creditors value.

The credit card world can be hard to understand, from the language issuers use to understanding how to use credit cards safely. Read on for 5 important things we think you should know before applying for and using your first credit card.

1. Know these key terms

It may seem like credit cards have their own language—that's because they do. Before looking at credit cards here are some key terms for you to know:

APR: Annual percentage rate (APR) is the total yearly cost of a loan, expressed as a percentage. APRs show the actual cost of borrowing money including the interest rate, mortgage broker fees, or any other costs involved in borrowing.

Annual fee: The yearly cost to have that credit card. Although cards with higher annual fees generally have more benefits, we recommend for your first credit card finding a card with no or only a small annual fee.

Balance: The amount you owe, as shown on your credit card bill.

Billing cycle: The period you have to pay your balance, which must be at least 21 days. It is the time between the end of the last closing statement (the time you had to pay last month's bill) and the next.

Cash back: A common credit card incentive, cash back refers to how much money you receive back for charges on a card. Some credit cards vary their cash back percentage for different categories, such as charges from gas or food.

Credit limit: The maximum amount you can spend.

2. Understand the costs and benefits of individual cards

Not all credit cards are created equal. Some charge annual fees, while others charge fees for balance transfers, cash advances, exceeding your credit limit, or other actions.

When beginning your search, it could be a good idea to look for a card that is specifically designed for first-time card holders. To keep your fees manageable, choose a card with rates and fee structures that match your expected behavior. To decide which card may be best for you, read the credit card policy agreement. Look for how and when your interest rate might increase, what actions carry fees, and how the issuer will charge for foreign transactions. If you still have questions, reach out to the issuer by phone or online. Most have resources to help explain the agreement.

Keep in mind that applying for a credit card causes a "hard inquiry" of your credit score, which can lower your credit score, especially if they are frequent. Be sure to do your homework upfront, since applying for multiple cards could hurt your credit score.

Quick tip: Actually read all the fine print—it's easy to overlook but important details may be hidden in there.

3. What if I'm denied?

You have a few options if a card issuer denies you a credit card. A good place to start is reading the notice of denial and taking steps to correct the issues the card company flagged. Taking these corrective steps may mean making an effort to pay off existing debt, correcting mistakes on your credit report, or taking steps to build a solid credit history. You can get a free credit report online, which should be indicated in the letter. To learn more about how to improve your credit score, read Viewpoints on Fidelity.com: 8 ways to help improve your credit.

If you know your credit is poor or you have no credit at all, you may want to consider signing up for a secured credit card instead. These cards are designed to help people with poor credit improve their credit score over time. Credit limits are usually under $1,000, and you're required to put down a refundable deposit when you sign up, which lessens the risk to the card issuer in case you fail to pay. Your monthly payment history is sent to the credit bureaus, and responsible use of a secured credit card can go a long way toward repairing poor credit.

You should only sign up for a secured credit card as a last resort. These cards often come with annual fees and high interest rates that could end up costing you hundreds or even thousands of dollars more if you fall behind on your payments.

4. Pay off charges right away

The best way to use your credit card is to treat it like a debit card. Only use your credit card for purchases that you could pay for with the money in your bank account.

The trouble comes when you spend more than you can pay off in a month. If your balance is more than you can manage to pay, then you're constantly catching up to your previous charges. If you're ever in that situation, a smart adjustment is to start paying your credit card bill right away. Log in to your account every day and pay off any charges you made. When you're starting to learn how to manage a credit card, it's important to develop habits that set you up for financial success.

5. Use cards safely

Credit card fraud and identify theft are major risks. Most cardholders aren't liable for fraudulent charges on their cards, but you still have a responsibility to keep your information safe.

Be proactive to reduce the risk of fraud by reviewing your monthly credit card statements and checking your account online more frequently. Keep your receipts so you can compare them with your monthly statement and charges. Then, notify your card issuer if you spot any transactions that you don't recognize. And, of course, report a lost or stolen card immediately.

Having your first credit card is exciting, but make sure to do all your homework before you apply. You always want to make an informed decision when it comes to your financial situation and reading the fine print of credit card agreements is a good idea. When you have a card in hand, make sure to establish good financial habits from the start to help build your credit score, and set yourself up for a lifetime of healthy borrowing.

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