What Happens When You Open A Credit Card Account?
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Applying for a new credit card can be a little intimidating, especially if it’s your first credit card. And if you’re lucky enough to be approved, you’ll receive a lengthy cardmember agreement with your new card that is probably not on the top of your reading list.
Once approved for a new card, you may have a lot of questions, such as when will it arrive, how soon can you start using it, how it will impact your credit score and what all those terms mean. With a little direction, we’ll have you on the right path.
Let’s review some common questions about new credit card accounts and key terms you should familiarize yourself with prior to using your card.
What happens once you’re approved?
After applying for a new card and receiving notification that you’ve been approved, an account will be created in your name. This happens immediately after your account is approved, and even if you don’t activate or use your card. You should also receive an email or snail-mail confirmation welcoming you to card membership with a reference number should you can need to contact customer service.
Some credit card issuers provide your credit card number instantly after approval, so you can begin using your account right away for in-store, online or mobile purchases.
It typically takes seven to 10 business days to receive your physical credit card in the mail, though some issuers offer expedited delivery that may have a fee. When you receive your new card in the mail, you’ll need to activate it before you can begin using it. Activation can usually be done online, via the issuer’s mobile app or over the phone. The card will typically have a removable sticker on it with activation instructions. Know that many issuers will allow you to use the card even if you don’t activate it; and know that the card account is considered open and active as well.
If you opened a credit card that charges an annual fee, you should expect to see a charge for the fee on your first billing statement. Also, if your credit card offers an intro 0% APR period for purchases or balance transfers, the introductory period typically starts the day you open your account. In some cases, balance transfer credit cards may begin the intro 0% APR period on the day you transfer a balance, so long as it is within the stated time period, usually 45 to 60 days from account opening. Check the terms and conditions of your credit card agreement for specific details.
When it comes time to make your first payment, you should receive a statement in the mail, unless you opted out of paper statements and elected to receive digital notifications. This notification will list your payment due date and statement balance, among other important information. As an added protection, you can set up autopay to ensure payments are made on time. If you don’t want to use autopay, you can set up account alerts that remind you when payments are due.
How a new credit card account can help your credit score
When you open a new credit card, your credit score can potentially increase due to an increase in your available credit. Each time you open a new credit card, you receive a new line of credit that boosts the total amount of credit you have available across any other card accounts. If you keep your balance(s) low in relation to how large your credit line is, meaning you don’t max it out, your credit scores will benefit. This is called your credit utilization ratio. The lower your utilization rate, the better for your credit score. The bigger the balance you carry will negatively impact your credit, so always try to pay off what you charge every month or keep your balance well below 30% of your credit limit.
To give you an example, let’s say your credit card comes with a $5,000 limit and you spend $3,000 a month on the card. That makes your utilization high at 60%. If you open a another credit card and receive a $7,000 credit limit while maintaining the same $3,000 monthly spending between both cards, your utilization would decrease to 25%. This is great since a utilization below 30% is generally considered ideal.
If you’re new to credit, opening your first credit card will begin your journey toward building a credit history with the big three credit bureaus: Equifax, Experian and TransUnion. Your card issuer will report the account and its payment history (which is the single most important factor of your credit score) to one or all three credit bureaus, which will ultimately feed into building your credit score.
How a new credit card account can hurt your credit score
When there’s a change to your credit history, such as applying for new credit, your credit score may temporarily dip as the issuer checks your credit profile. This is called a hard inquiry and can temporarily knock your score down anywhere from five to 10 points. However, it should bounce back as time moves on as long as you practice responsible credit behavior.
If you apply for several accounts within a short period of time, you can do more damage to your credit score with each application. A helpful feature several credit card issuers offer is prequalification, where you can check if you may qualify for a credit card with a soft pull of your credit with no harm done to your credit score. Just beware that prequalification is not a guarantee of approval, and you will still need to submit a regular application for the credit card that will ultimately result in a hard inquiry.
Also know that when you’re approved for a new credit card, your credit score may lower since the average length of time you’ve had credit decreases. For example, if you currently have two credit cards opened five years ago and 10 years ago, the average length of time you’ve had credit is 7.5 years. But if you open a new credit card today, you have to factor that into the average length of time you’ve had credit and it will decrease to five years. The longer you’ve been properly handling credit, the less impact a new card account will have on your average credit age.
So, while your credit score will be impacted with a new card opening, know that it will recover in the long run if you use the card responsibly.
Common credit card terms to know for new cardholders
As mentioned earlier, you’ll receive a long cardmember agreement in the mail with your new card. Odds are you won’t read the agreement in its entirety, or maybe not at all. However, you can be missing out on some important information that you should know before using your card. Note, the list below doesn’t include every credit card term. You should still review your cardmember agreement to familiarize yourself with all the terms of your account. Key terms can be found in the “interest rates and interest charges” table.
Here are some important credit card terms any new cardholder should know:
- Annual fee: Relatively self-explanatory, your card’s annual fee will be billed each year on your account anniversary date.
- Purchase APR: This is the interest rate charged to new purchases that aren’t paid in full during your card’s grace period. Read our guide on the five different types of APRs your card may incur.
- Grace period: Most credit cards have grace periods, which allow you at least 21 days to pay your bill without incurring interest charges.
- Statement closing date: The last day in your billing cycle. Purchases made and posted after this date will appear on your next billing cycle.
- Payment due date: The date your bill is due. This remains the same each month, but oftentimes, you have the flexibility to request a due date that best works for you.
- Minimum payment: The minimum payment listed on your credit card statement is calculated one of two ways — as a percentage of your total balance or as all the interest owed plus 1% of your principal balance. Most issuers set a floor, which is a fixed dollar amount — commonly $25 — and is the lowest amount your minimum payment will be. Making only the minimum payment toward your balance isn’t an effective way to pay your bill since there’s compounding interest. Paying just the minimum payment on a large balance won’t make a huge dent in what you owe. Issuers include a table on your statement showing how long it will take to pay down your balance if you just pay the minimum.
- Late fee: If you pay late or miss a payment altogether, you’ll incur a late payment fee that can be up to $38.
- Penalty interest rate: In addition to a late payment fee, many cards charge a penalty interest rate on late or missed payments. This rate is higher than your regular purchase APR and has the potential to last indefinitely if you continuously pay late. However, the Credit CARD Act of 2009 requires issuers to reinstate your regular purchase APR if you make consecutive on-time payments during the six months after your penalty APR is issued.
- Foreign transaction fee: If your card has a foreign transaction fee, purchases made outside the U.S. will incur a 3-5% fee.
- Balance transfer fee: If you plan on transferring a balance from another card to your new credit card, beware many credit cards charge a 3-5% balance transfer fee for each transfer.
How to avoid ‘balance creep’
Purchases made with your card are subject to interest charges, but it’s possible to use your card and never pay a cent of interest. The key is to pay each bill on time and in full. As long as you pay your bill within the grace period, you won’t be charged interest. If you don’t pay in full and keep adding to the balance, you could be setting yourself up for trouble. It’s critical to keep your balance under control and if you have to roll over a balance to finance a large purchase, have a repayment plan in place.
Know when to put the card away
Opening a new credit card can be exciting — you now have expanded buying power and may have the ability to earn an introductory welcome bonus or rewards, benefit from perks like free shipping or travel insurance and much more. While a credit card can be a great asset, there’s a lot of responsibility that comes with it. You can be easily tempted to overspend to earn a sign-up bonus or reach a certain amount of rewards points. And, since a credit card is a piece of plastic — not physical cash — you may spend more than you’re able to pay for at the time of purchase.
As a result, you need to practice responsible credit behavior and know when to put the card away. You should only charge what you can afford to pay by your statement due date and can even take that a step further and only charge what you can afford to pay at the time of purchase. This can help you avoid overspending and falling into debt.