First Credit Card
Reader Question from Sarah in Idaho:
“I want to get a credit card because I need to start making good credit! I am 23, and I don’t have anything right now. (I want one soon, because I’m going to be buying a new computer and I figure that’s a big enough purchase to start me off well with a credit card.) A friend suggested I get one from my Credit Union, and I’ve heard that’s what you did. Would that be the smart thing to do? My credit union has two options on their website, which would be better? How do I go about getting one? How does it work?”
Thanks for the question, Sarah! You’ve asked about quite a few important topics in your question - so I’ll cover each briefly, and if you have further questions, we can move into greater detail afterward.
1. Establishing Credit. Yes - it’s time for you to establish credit. If you are employed, and are over the age of 18 - it’s time to establish credit. Your credit score will rule your financial life - and being 23, you’ve got some big financial decisions ahead of you.
2. Credit Cards. Though often given a bad rap in the LDS culture - are very necessary. I like to look at a credit card like some of the brethren have looked at the internet. The internet has brought about great things in moving forward the kingdom of God. It also is the cause for a great deal of evil. It simply depends on how you use the internet to enrich or enslave your life. A credit card is the same.
3. Your Computer Purchase. If you’re planning on putting your computer purchase on your credit card, I think there’s a better way to go. If you’re hoping to build credit while minimizing the money you spend on interest (and minimize your debt), I would suggest NOT putting your computer purchase on the credit card, but on another sort of loan.
The credit union you’re looking at (the best credit union in Idaho, by the way) as well as most credit unions, offer unsecured loans. The interest rate on the unsecured loan is lower than the interest rate you’d be getting on your credit card. Therefore, I would open both the credit card and the unsecured loan, and use the credit card for small and simple purchases that can be paid off each week (treat it like a debit card) and use the unsecured loan for paying off your computer - as soon as possible (hold it for 6 months to gain the lift on your credit report - then pay it off as soon as possible). Beehive FCU allows you to make extra and early payments, and to pay off the entire balance without any penalty - so this is an excellent way to go.
4. Credit Union Credit Cards. When it comes to credit cards, I always recommend people stay away with the cards that have all the bells and whistles. Find a simple card from a credit union you trust. Visa or Mastercard works just fine. You want a card that has a 25 or 30 day grace period, the lowest interest rate possible, and no annual fees. The reward programs seem nice - but in the end, they’ll come back to bite you. Recent credit card law changes will prove to cause the A+ borrowers (borrowers with good credit scores that take advantage of the reward cards) a lot more grief than in the past. Credit card companies will be losing a lot of the money they used to make on the borrowers with poor credit, and will have to make up for it somehow (this is an entire subject for another article).
5. Your Two options at Beehive. This one is simple - most credit unions have fairly tough requirements in order to qualify for their ‘Platinum’ cards. You won’t be eligible for the Beehive Platinum for another few years. The Classic will do.
6. How to Proceed. Every credit union is different, but here’s what you’ll need to do at most credit unions:
- Make sure you have a checking or savings account with the credit union. If you don’t - open one!
- Choose the card you’re interested in and research it. Make sure it fits the guidelines we talked about above. Don’t be afraid to ask questions, it’s your first time with a card - you ought to have questions. Make sure you know your credit card rights.
- Gather together your income information for the past 1-2 years. A W2 is great, along with your 2 most recent pay stubs. They want to know how much money you make.
- Visit your credit union. At Beehive, any loan officer will be great to work with. Ask to set up a credit card! Beehive’s classic card is meant for helping first time borrowers build credit, and they’ll most likely start you with a $200-$300 limit, depending on what you make at work.
- If you have $200-$300 in a savings account that you won’t need for the next year or so - ask about a share-secured loan https://www.bhive.org/info/?ID=26.
- If you’ve not been working very long, and have very little money in your checking/savings account, don’t be offended if they ask for a cosigner. Be prepared to bring a family member that is able to cosign (steady employment for 2 plus years, good credit with limited debt, and willing to sign).
- When you come close to the time for your computer purchase - look into an unsecured loan. The interest rate on Beehive’s unsecured loan is lower than their Classic card’s interest rate - and I think it’s good practice to avoid putting large purchases on a credit card.
- For this loan, the chances are very high that they will require a cosigner. That’s okay - don’t be offended. See if a family member is willing. Take the loan to the shortest term (time in months) that you feel you can, keeping the monthly payments within an acceptable range for you and your income. We can talk more about that loan as it comes closer.
7. How does the credit card work?
- After filling out the credit card application at the credit union and talking with a loan officer, you might be approved right away, or they might ask you for more information, and approve you after a day or so. It will take a week or so to get your credit card - and you’ll be ready to spend!
- I would strongly recommend you treat your credit card like a debit card - don’t spend money you don’t have. Use it for small purchases as needed, then pay off your debt at the end of each week. Be sure to sign up for online bill pay (Beehive has WebBranch, very easy to use). This makes controlling your credit card very easy!
- As a general rule, if you’re trying to build your credit, try not to carry a balance on your card that’s more than 15% of your credit limit. (If they give you a $300 limit - don’t spend more than $45 before paying it off and cleaning the slate. Keeping a balance on the card, especially a balance that is more than 50% of your limit - is NOT a good way to build credit.
- If you use the card regularly (once a week or every other week) and pay off the balance on a weekly basis
- You’ll be on your way to a nice credit score within about 3-6 months, and you won’t have to pay a dime in interest.
Hope this helps! There’s a lot to talk about in each of these topics, so if you’d like more clarification on something, let me know and we’ll talk some more!
