Lesson 5.5 · 3 minYour first credit cardYour first credit card
This lesson explains how a credit card works, what federal law asks of applicants under 21 and how to use a first card to build a credit history without carrying debt. Handled with care, a card can help you later when you rent an apartment or apply for a car loan.
How a card works
A credit card lets you borrow up to a limit and pay it back later. Each month the issuer sends a statement showing the balance, a minimum payment and a due date. Paying the full statement balance by the due date usually means no interest on purchases, while paying less leaves the remainder to collect interest.
The card's interest rate, called the APR, appears on the application and on every statement. Card rates usually run much higher than rates on federal student loans, so a balance carried for months grows quickly. Read the fee section too, including late fees and any annual fee.
Applying when you are under 21
A federal law called the CARD Act requires applicants under 21 to show independent income that can cover the payments or to have a cosigner who is at least 21. Pay from a job counts as income, and the issuer may ask about it on the application. A cosigner shares responsibility for the debt, so a missed payment affects both of you.
Some students start as an authorized user on a parent's card, which can add history without a separate application. Others choose a secured card, where a deposit you pay sets the limit. Ask the issuer whether it reports to all three credit bureaus, because that reporting is what builds your history.
Habits that build a good record
Set up automatic payment for at least the minimum so a busy week never turns into a late payment. Then pay the full balance yourself each month. Late payments can bring fees and stay on your credit report for years.
Keep the balance small compared with your limit, and use the card for a few planned purchases rather than spending you cannot cover. Choose a card without an annual fee when you can. You can check your credit reports at annualcreditreport.com, the site set up under federal law for free reports.
Offers on and around campus
Card offers often turn up at orientation, sports events and on student websites. Federal law limits the gifts card companies can hand out on or near campus to get you to apply. Take the paperwork home, read the terms and decide later rather than signing at a table.
If you spot a charge you did not make or a problem with your account, contact the issuer first. The Consumer Financial Protection Bureau takes complaints about credit cards and explains your rights on its website.
Try this week
- Read the APR and fees on any card offer you have
- Set up automatic payment of at least the minimum
- Request your credit reports
- Ask an issuer whether it reports to all three bureaus
Takeaway. Pay the full balance on time every month, and a first card builds your credit history instead of a debt.