Vocab & Tips
Helpful Definitions
Annual Fee: a charge for keeping an account open, similar to a yearly membership.
Balance: how much you owe on a revolving credit account, like a credit card.
Annual Percentage Rate (APR): the total cost of interest and other fees charged on any unpaid part of your balance. It is averaged over a year and expressed as a percentage. The lower the number, the better.
Credit Limit: designates the max amount of money the card issuer has agreed to loan you at any one time.
Credit Utilization Ratio: the amount of credit you're currently using divided by the total amount of credit you have available.
Late fees: charged when you pay late by even one day or if you don't pay at least the minimum amount due.
Foreign Transaction Fees: charged when using your card to make purchases outside the US.
Minimum Monthly Payment: the minimum dollar amount that must be paid each month to keep your revolving credit account in good standing.
Things to Know Before You Apply For Your First Credit Card
It can be kind of overwhelming to get your first credit card, especially if you're bombarded by terms and research that you don't know about. Here are a few tips to help you get started:
-
You can see rates and fees before applying. Credit card issuers are required by federal law to publically disclose certain terms, including the annual fee, annual percentage rate (APR), foreign transaction fees, and late fees.
A Schumer box breaks down two main aspects of any card: interest rates and fees.
-
You should pay in full and on time every month and stay well below your credit limit. As a general rule, you should keep your balance under 30% of your available credit at all times.
-
You can and should pay more than the minimum. Paying more than the minimum on your credit card bills helps you chip away at your overall balance, which improves your credit utilization and raises your score.
-
Getting too close to your limit can drop your credit score. The lower your credit utilization, the better.
-
Credit card fees are avoidable. Plenty of starter cards don't charge annual fees, late fees aren't an issue if you pay on time, and foreign transaction fees are irrelevant if you don't plan on using your card to make charges outside the US
-
Interest is avoidable too. Regardless of how high your APR is, you don't have to pay anything as long as you pay your credit bill in full every month.