Understanding Credit for First Time Users

As you become more responsible with your finances, your parents may trust you with your own credit card. The act of taking on debt may seem frightening, but building up credit at an early age can help you with future financial investments like getting a loan for a car or mortgage. As you are gearing up to get your first card, you should do your best to educate yourself about what lenders will look for in a responsible user and how you can build up credit. Here are a few things to be aware of when applying for your first credit card:

What a lender looks for
As you are looking at credit card applications online or at your local bank, you should know the factors lender look at when deciding whether to issue you one. The biggest concern the lender will have is whether or not you are going to be responsible with this financial commitment. A bank or lender is bestowing upon you a significant amount of money to borrow, so they want to make sure you are a trustworthy borrower. Here are a few factors lenders will look closely at:

  • Steady source of income
  • List of references or co-signer
  • Form of collateral
  • Number of inquiries on your credit report

Since this is your first card, chances are you won't have a lot of credit at the beginning. This is very common for first-timers, so you may want to ask your parents to co-sign the application with you. By seeing that a responsible credit user has co-signed to your application, lenders will feel more safe with issuing you a card.

Building up credit at first
Along with having co-signers, you may want to investigate whether your bank will allow you to be an authorized user on one of their accounts. During this process, you will be able to use their credit card, but you will not be legally responsible for paying the debt back. When your parents use their card, you will be able to build up credit from their purchases, as well. This is not only a good way to start the credit building process, but it can teach you financial responsibility as well.

Although you can use their credit account, make sure you don't overspend. Getting your parents deeper into debt may not be the best way to show them you are responsible with credit.

Store credit cards
There are many options that can help you build up credit that you don't have to visit a bank for. One of those options is to apply for a department store credit card. This card will be linked to a credit account at a specific store, preferably one you frequent. Although these cards generally have high interest rates and low credit limits, conservative spending on this card can help you slowly build up credit and improve your score.

Secured card
One type of card to apply for as a first-time user is a secured credit card. Overspending is one of the quickest ways to get into debt and this type of card can help you prevent it from happening. Under these regulations, you will only be able to spend what you put on the card. For instance, if you want to spend $50 on an upgrade for your computer, you will have to deposit $50 dollars on this card. By setting restrictions about how much credit you can use, you will be able to teach yourself self-control and prevent from spending beyond your financial means.