Young adult's first credit card - what to look for and what to avoid

Question

What should a young adult - with no credit history, moving out of the parent's home, and not going to college - look for in their first credit card?

I mean for comparing various credit card programs & companies in order to choose which one(s) to apply to. What should it have (eg. interest free pay off in the same billing cycle), and what should it not have (eg. an annual fee)?

Also, what are the reasonable expectations for what said young adult can get? (Like credit limit, interest rate, anything else you can think of)

I'd prefer a detailed answer, with reasons why for each pro and con you advise looking for. Assume complete ignorance about credit cards. :-)

Answer 1

In the US, I'm unaware of any card that doesn't have an interest free grace so long as you pay in full every month. In other words, I charge in January, get a bill Feb 10th, and pay by Feb 25 in full to avoid any interest getting charged.

Since I'd advise to always pay in full, I've never paid any attention to the interest rates on the cards I have.

The top thing is the cash back. I've written many times about how my 2% cash back card has funded a 529 account for my daughter's college. After 17 years, the account is now worth over $25,000. If you're planning to do any math, keep in mind, the deposit were less than half the value, the rest is growth. There are a number of cards offering 2%, not just mine, others will deposit to a brokerage acct or just issue you a credit.

No fee. It's that simple. The combination of high cash back and no fee is the ideal card for me.

Do your own homework, there are other perks, and cards with convoluted rolling bonus plans, which I've never cared for. There's are also cards that offer as high as 6% at grocery stores, but for a single person, that benefit might not be optimum.

Answer 2

I would avoid any card that charges an annual fee or any card that charges interest on purchases even if you pay the balance in full every month.

That still leaves a lot of cards though so how to chose between them. Well it really depends on how you plan to use the card.

If you plan to clear the bill in full every month then the APRs really don't matter to you. So you should be comparing the perks you can get. There are many different perks (cashback, points in various schemes, low/no fees for foreign transactions etc). Since i'm in the UK i'm not sure exactly what perks are available on the US market and which perks are best for you will depend very much on your situation.

If you want to make a single big purchase and use the card to spread the cost over a year or so then you want a card with a low (ideally zero) initial rate that lasts long enough to clear your big purchase. If you want to make another big purchase later then you probablly want to get a new card at that point.

I would advise against using the same card for both purposes. The best deals for the two purposes are likely to be quite different and it will make it much harder to keep track of things.

I wouldn't worry too much about credit limits. If you are running into them then it probablly means you are buying stuff you can't afford.

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Since you say assume complete ignorance of credit cards I feel I have to include a section on what to do once you get it.

In general (there are exceptions such as if your only other alternative is a payday loan or on some travel cards for taking money out abroad) it's a bad idea to take cash out on a credit card. Unlike purchases cash advances will start accrusing interest immediately and there may also be fees associated. At least in the UK cash advances are also reported to credit ratings agencies, I don't know if that is the case in the USA too).

Credit cards will generally charge fees for foreign transactions. You can get these fees down by carefully selecting your card (I know in the UK there is a card available with zero forign transaction fee, I don't know if there is in the USA).

Any borrowing of money requires discipline to avoid making your life worse in the long term. Don't treat a credit card as a license to spend beyond your means.

It may be a good idea to move some of your regular spending to the card to take advantage of perks and to build up your credit history. Again though don't treat this as free money or a license to spend more than you otherwise would.