Depending upon your credit history or lack thereof, you will usually be subject to higher interest rates of at least 22% or more for most first credit cards. This is because you are considered a risk if your credit is poor or nonexistent.
Lower interest rates are typically reserved for those with good credit scores. This article will explain more about interest rates and the types of cards geared toward first time cardholders.
A good place to start looking for your first credit card is the credit card chaser!
Sometimes not having any credit history is worse than having a blemished credit report. However, there are cards available that can help you build your credit history and have you on the road toward lower interest rates.
How do credit card companies set their interest rates?
Interest rates on credit cards are generally tied to the prime rate of interest, which is what banks charge their best customers. There may be different interest rates for purchases, cash advances, and balance transfers. While the prime rate is around 3.25%, credit card companies tack on 10 to 14 points. The average credit card interest rate today is around 14%. This is an average, and your rate may be higher.
How is interest on credit cards computed?
If your annual credit card interest rate is say, 20%, it is divided by 365 to get your daily interest rate, or .0548%. This is multiplied by your daily balance due on the credit card. If you owe $1,000 on a given day, your interest for that day would be .55 cents. This interest is added to your balance, so on the next day, your interest computation would be based on a balance of $1,000.55.
This goes on throughout the month, and is called compounding. That is, interest is computed on interest previously calculated. This makes your nominal interest rate of 20% into an effective rate of over 22%.
What about zero interest rates?
Many credit card companies offer so-called teaser rates that start as low as zero, but then increase to the usual rate after a period of time. What seems at first as a good deal at zero percent for so many months can quickly become a nightmare once the honeymoon period with that first card ends. One way to avoid paying any interest is to pay your entire credit card balance each month.
What if I’m a student?
Several companies offer credit cards aimed at students. Some have introductory zero percent interest for the first six to nine months. Then the interest rate jumps to 14 to 22% depending upon your credit history and utilization. Credit card companies generally consider students to be good credit risks, so you may be able to get one of these cards for students with no credit history.
What if I’m not a student and I have no credit history?
This generally places you in the same category as those with a bad credit history. In that case, you may have to put up security to obtain a secured credit card. You may also have to pay an annual fee. Your credit limit will usually be equal to the security you put up. For example, if you put up $200 as security, that will be your credit limit. Interest rates on these credit cards are over 22%.
Why would I want to deposit money to get a secured credit card?
There are two reasons. First, making regular payments will increase your credit score and your allowable credit amount. Second, you will have the convenience of a credit card. You have to start somewhere, and this is a good way to develop a good credit history. After it’s established, you will no longer have to put up security.
Can I avoid paying interest?
If the credit card company receives your payment for the full balance on or before the monthly due date, there is no interest charged. The previously computed interest is not included in the balance due. If you do not pay the full balance, the interest computed remains and it can eat up a large part of your monthly payment. That is why if you make only the minimum monthly payment, it can take many years to pay off even a relatively small balance.
If your payment is received after the due date, late charges will also be added. Note that the date of receipt by the credit card company is the determining factor, not the date the payment is mailed. Under the new credit card law, statements must be received at least 21 days before the monthly due date. Learn more about credit card fees and interest rates at the Federal Trade Commission’s website.
Ready to search for a secured credit card or student credit card? Use our credit card finder now!
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