A Guide for Credit Card Newbies

How to avoid carrying a balance, over-limit fees, late payments, and other credit-damaging behaviors.

Young woman using her digital tablet and credit card to bring joy to the world
By + More

For many teenagers, there's no better feeling than the first time they hold a credit card. The rush from running one's fingers along the raised numbers, as they watch the card shine with each turn, sends tingles up their arms. They think, "Now I can afford everything I've always wanted." Despite such excitement, these newbies need to know how to use a credit card responsibly if they want to set themselves on a path toward a stable financial future.

Teenagers commonly start building credit by having their parents make them an authorized user on their card; other parents co-sign for their child to get their own credit card (minimum age requirements vary by lender). While consumers used to be able to qualify for their own credit card when they turned 18, the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 requires anyone under 21 to either have a cosigner or verifiable income that proves they have the means to repay the debt.

No matter how their first credit card is obtained, many teenagers make mistakes—some of which have detrimental effects on their financial lives. Janna Herron, credit card analyst at Bankrate.com, says impulsive teenagers are the most likely to abuse credit. "A lot of spontaneous buyers—people who want instant gratification—would get a credit card and buy everything they see simply because they have the means to do so," she says. Such teenagers who immediately spend a paycheck or money they received as a birthday present need to reform their habits before getting a credit card.

Those without controlled spending behavior may confront early blunders with credit, some of which can follow them for decades. "Most people start using credit between 18 and 22 years old, and depend on credit into their seventies," says John Ulzheimer, president of consumer education at SmartCredit.com. "That's a long period of time. When you're building wealth, applying for mortgages, or co-signing for student loans, you're really depending on your credit to finance these necessary purchases."

[Read: Is Your Teenager Ready for a Credit Card?]

Consequently, Ulzheimer says it's important to start building credit as early as possible. He says those who wait until they're out of college to get their first credit card won't have good credit to lean on when they go to apply for a car loan or lease an apartment. The higher interest rates some are offered will not only be costly but can complicate whether they can afford to take out a mortgage.

With credit playing an important role in a number of financial determinations, learning good habits at the start can give consumers the edge they need when applying for an auto loan, a mortgage, or even a job. If you're on the verge of becoming a credit card user, here's what you need to know to understand how to use this light, yet powerful, piece of plastic:

Take control of your spending. Before applying for a credit card, create a budget. You can use a website such as Mint.com to track your spending over the course of a month. Take note of what you're spending money on and pinpoint where you can cut costs. If you know where your money is going, you'll have a better idea of how much you should be charging within a given cycle, says Bill Hardekopf, a credit expert with LowCards.com.

Also pull your credit report, which you're entitled to view for free once a year (annualcreditreport.com), to make sure no one has stolen your identity and used your credit for fraudulent purchases.

Figure out what you want. Which credit card is right for you depends on what you're looking for, says Herron. Some applicants want a card with no annual fee, while others are enticed by a sign-up bonus. For some, the decision may come down to small terms, such a card with no foreign transaction fees that sounds enticing to students who plan to study abroad.

While many teenagers decide what card they'll apply for based on the annual percentage rate (APR), Ulzheimer says that shouldn't always be the deciding factor, since people don't know what interest rate they qualify for until after the application is processed. But applying for multiple cards at once will dent your credit score, as each triggers a hard inquiry on your credit. Ulzheimer says the interest rate is only a determining factor if you think there's a strong likelihood you'll carry a balance from month to month—in which case, you're setting yourself up to lose money in exchange for establishing credit. Those confident they can pay off their bill each month may want to look for a good rewards program.