What Type of Card Should I Get?
Your first credit card doesn’t have to be some fancy card that’s gold or platinum and has a robust rewards program that gives you free plane tickets to Paris every year (although that would be nice). Save that for later in life when you can use your card for big purchases without breaking a sweat. Here are a few types of credit cards that are available to young people just starting out in the financial world:
1. Secured Credit Card
A secured credit card is great regardless of whether you are over or under twenty-one. To use a secured credit card, you must make a security deposit of a few hundred dollars. This security deposit acts as the credit limit. If I deposit $300 to the card, that’s the maximum amount of money I can spend. If I start going crazy shopping at J. Crew and charge up a $300 balance, and fail to pay that $300, the credit card company will take my security deposit as collateral. It’s just like a security deposit when renting an apartment: if you trash the place, well, good luck getting your money back when you move out.
Beware of the relatively high fees associated with secured credit cards, so shop around to find the best one by doing a Google search.
The goal of having a secured credit card is to eventually be approved for a traditional line of credit (your more standard card that doesn’t require a security deposit). In order to accomplish this goal, use the card responsibly. Even one mistake can throw you off course. Here are some tips:
• Did I mention that it’s important to pay off the balance in full and on time? Let me reiterate this again: pay it in full!
• Never approach or exceed your credit limit.
• After one or two years of responsibly using a secured credit card, you’ll be able to apply for and receive a traditional credit card (like AmEx, MasterCard, etc.) with a larger credit limit and perhaps even a robust rewards program. You can apply for a traditional credit card from the same company that issued your secured card, or, now that you’ve established some sort of a credit record, you can try your luck at applying for a card from a different company. The choice, my friends, is yours!
2. Department Store Credit Cards
We’ve all been there: you’re shopping at Target, and the cashier asks, “Would you like to get a store credit card and get a 10 percent discount every time you shop?” Tempting, isn’t it? Let me warn you, it’s not a good idea! Here’s why:
1. Interest Rates: Interest rates on department store credit cards are rather high, much higher than a traditional credit card from a creditor like American Express or Visa. For example, a Bloomingdale’s credit card has an interest rate of around 24.5 percent (the rate is variable, meaning it fluctuates). A credit card from Kohl’s has an interest rate of 21.9 percent, but that rate will jump to 24.9 percent if you make a late payment. So if you buy a $200 dress or a $200 suit and get a 15 percent discount using your store card, but then you don’t pay off the balance in full and the 22 percent interest kicks in, you’re actually now paying 3.7 percent more for the item than you would have if you had used cash. That doesn’t make financial sense!
2. Urge to Shop: Let’s say you get a credit card from a department store you love to shop at (hmmm…Macy’s? Bloomingdale’s?) and, as a result, every time you use the card at the store, you receive a 15 percent discount. That sounds great at first, but really it’s just the store cultivating your urge to shop. This discount may give you an excuse to buy unnecessary items in that store. It’s called “wandering eye” shopping. “That leather jacket looks nice. Yeah it’s $500, but with my Macy’s credit card, I’ll get a 15 percent discount.” Nope! Put the jacket down and get the hell out of the store—you’re not buying it! Tough!
3. Your FICO Score: As I mentioned in the last chapter, department store credit cards are generally looked down upon from FICO’s point of view. Enough said.
If you can find a parent or relative who is willing to cosign on the card (no bribing allowed!) and you’re over twenty-one, then go ahead and apply for a traditional card from a creditor like Capital One, Visa, or MasterCard. Be aware of the interest rate: it is variable, meaning it can change at any time. You’ll rarely find a credit card with a fixed interest rate that you can just lock in and not have to think about.
4. Credit Union Cards
In addition to checking and savings accounts, credit unions also offer credit cards, with the following perks you may not get from the land of American Express or Visa:
1. Better Rates: Credit unions usually have lower interest rates on their credit cards. Remember, credit unions are nonprofit, and, unlike regular credit card companies, don’t waste money on lobbying or high executive bonuses. Credit unions use that savings to offer more attractive products to its members. Why should you care about a lower interest rate on a credit card? If you leave a balance on the card and the interest kicks in, well, it’s better to have a lower rate than a higher one—since that means you’ll be charged less interest, and thereby, owe less money But, since you’re following all of the advice in this book to a tee, you’ll be paying off your balance in full each month, right?
2. Fewer Fees: If you get a traditional credit card, I bet you’ll soon feel sick and tired of the endless fees the major companies charge. Don’t be surprised to find that most credit unions have very few fees, if any.
3. It’s Personal: Since credit unions are smaller and formed by members only, it is not uncommon for members to receive face-to-face time with credit union representatives to ensure that each member clearly understands the terms of their credit card. You’re treated as a valued member of the credit union, as opposed to just another customer, like at a bank.
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