Credit cards give you access to a revolving line of credit that allows you to borrow money from a card issuer to make purchases.
What is a credit card?
When you use a credit card to buy something, you’re using a revolving line of credit extended by a credit card issuer. You agree to pay back the amount spent on a timely basis.
Every month, your credit card issuer will send you a billing statement listing items like purchases, fees, interest and credits. You can pay the full monthly balance (the total amount you owe), the statement balance, the minimum payment due or anything in between. If you don’t pay at least the statement balance, you will be charged interest.
If you don’t make a payment at all or pay less than the minimum due, this can damage your credit score, and you may be subject to late fees. In addition, you may not be able to use your card for new purchases.
Credit card features
There are many different features of credit cards to consider. For example, credit cards can offer a low intro APR on purchases, balance transfers or both, or they may let you earn points, cash back, or miles that you can redeem for rewards.
Credit cards can also be secured cards or unsecured cards. “Secured” and “unsecured” refer to whether you need a security deposit to open and use your account. Secured credit cards typically require a security deposit equal to your credit limit, while unsecured credit cards do not.
Check a card’s terms and conditions before applying to understand the ins and outs of its perks and features. That way, you’ll know whether a potential card’s benefits meet your needs.
How to get a credit card
Getting a credit card will involve filling out an application where your creditworthiness will be reviewed by the credit card issuer, including a hard credit inquiry into your credit file. This inquiry may cause a temporary decline in your credit score. You must be at least 18 years old to apply.
You’ll also need to provide personal information, which can include your:
- Full legal name
- SSN and/or ITIN
- Mailing address
- Gross annual income
- Monthly mortgage or rent payment
- Phone number
Credit card pre-selected offers
Have you ever gotten a pre-selected offer for a credit card by mail or email? This typically means a card issuer has prescreened you for an offer by checking factors like your payment history (they usually do this by performing a soft credit inquiry). A pre-selected offer can mean you have a good chance of being approved for the credit card.
However, keep in mind that you’ll still need to apply for the card. The pre-selected offer does not guarantee your application will be approved.
Credit card basics
Here are some credit card essentials for beginners:
- Statement: A monthly bill that summarizes the activity on your account. This can include the statement balance, purchases, payments, credits, interest charges and other transactions for the billing cycle.
- Current balance: The total amount you owe on a credit card at the given moment.
- Statement balance: The amount owed on your card at the end of a billing cycle.
- Interest rates: Interest rates are expressed as a percentage. Your interest rates determine how much you may pay over time for transactions like cash advances, purchases or balance transfers. Different types of transactions can have different interest rates.
- Fees: Credit cards may have fees, such as late fees applied to late payments, balance transfer fees applied to balance transfers and foreign transaction fees when making purchases abroad. You’ll want to understand how fees are charged to your card account before you begin using your card.
- Cash back and other rewards: Some cards will offer cash back or other rewards for certain purchases. Familiarize yourself with your credit card rewards program if you have one, so you can take advantage of it when possible.
Credit cards vs. debit cards:
Credit cards and debit cards are common ways to make purchases. However, there are some key differences.
With a credit card, you use a line of credit to make your purchase. You borrow money from the card issuer. The issuer then sends you a monthly bill for the purchases you’ve made with your card.
When you use a debit card, you’re paying for a purchase using money from your checking account. You don’t receive a bill later or pay a balance.
Benefits of credit cards
There are several benefits to responsible credit card use, including:
Building your creditworthiness
Credit cards can be a helpful tool in improving your creditworthiness. For example, responsible credit card use can help you start to build a positive repayment history, and if you keep your balance down, you’ll also keep your credit utilization low. Getting a credit card for the first time may also improve your credit mix (the different types of credit you have). These factors and more can contribute to your credit score.
Cash back or other rewards
Some credit cards offer cash back, points or miles on everyday purchases. Remember to familiarize yourself with the terms and conditions of your credit card rewards program if you have one. Rewards programs can vary depending on the type of credit card you have.
Convenience
Credit cards can offer a convenient way to make purchases. You’ll be able to make online purchases with your card, as well as take advantage of features like contactless pay or mobile wallets if they’re offered by the issuer.
Fraud protection
Credit cards have fraud protection measures that can help make them more secure to use. If fraud occurs, notify your card issuer immediately. You can typically contest the charges and if the charge was unauthorized, you can have them reversed, depending on the terms of your credit cards.
Keeping track of your spending and credit score
Because credit cards track your transactions, they can be a great tool for budgeting. You can use your monthly credit card statement to get a better picture of your spending habits conveniently and efficiently.
Some credit cards provide access to free credit score monitoring. Having a credit card with this feature can be a good way to help monitor your creditworthiness.
Using a credit card effectively and responsibly
Here are some tips for using a credit card responsibly:
Pay your bill on time
Paying your bill on time is vital to responsible credit card usage. Not only can it help keep your credit card debt from building up, it also can help you develop and maintain a positive repayment history, which can improve your creditworthiness.
If you’re able to pay your statement balance in full each month, you can avoid interest charges.
Keep your balance below 30% of your available credit
Keeping a handle on your available credit plays another part in responsible credit card usage.
When you use less than 30% of your total available credit across all cards, you can improve what’s known as your “credit utilization ratio,” which is the percentage of your total available credit that you have used. Keeping your utilization low can help you improve your credit score over time.
Review your credit card statement and account online to track spending and help avoid fraud
Regularly checking your credit card statements and account online can help you track spending and provide a picture of your credit usage.
Viewing your statements and account online can alert you to any fees or interest charges. It can also help you track any suspicious activity on your account and alert you to possible fraud.
Consider keeping credit card accounts open and active
If you have a credit card, consider using it somewhat regularly to help avoid getting your account closed by an issuer due to inactivity.
If the issuer closes the card account, it can increase your credit utilization ratio by decreasing your total available credit. This can have a negative impact on your creditworthiness. Closing the account can also affect the average age of your accounts.
Credit cards offered by Citi
The Citi Custom Cash® Card and the Citi Double Cash® Card can be great choices. Both cards offer cash back on purchases.
Frequently asked questions
1. What happens if I don’t use my credit card?
If you don’t use your credit card for a certain period of time, your card issuer may close your account. A closed account could negatively impact your credit score, as it may lower your total available credit, which could then increase your credit utilization ratio.
Additionally, even if you don’t use your card, it’s still a good idea to log into your account regularly to monitor it and ensure everything looks as it should. This could help prevent fraudulent charges from going unnoticed.
2. What is a credit card limit?
A credit limit is the total amount you can charge to a specific card.
3. How do I increase my credit limit?
You may be able to increase your credit limit if you pay your bills on time each month and avoid using your entire credit limit. Once you’ve demonstrated responsible card use and established a positive payment history, your lender may assess whether to increase your credit limit.
Some lenders increase your credit limit automatically or will reach out and offer a credit limit increase. You can also request a credit limit increase.
4. What is an APR?
An APR or annual percentage rate is a card’s yearly interest rate. Different rates can apply to different balances on your card account. Your account, for example, may have one APR on purchases and a separate APR on cash advances.
5. How do credit card payments work?
Each month, you’ll receive a statement that summarizes your credit card usage. It will also include a statement balance and minimum payment due date.
To avoid interest, you must pay the full statement balance each month by the due date. If you don’t make at least the minimum payment by the due date, it may count as a late payment. This can negatively impact your payment history and lead to penalties such as late fees and higher interest charges.
6. How does credit card interest work?
Whenever you pay less than your full statement balance each month by the due date, your credit card issuer will typically charge interest on the portion of the balance not paid.
How much interest is added depends on the interest rate as well as your total outstanding balance. The interest rate can vary depending on the type of balance on your account. For example, the interest rate applied to purchases may be lower than the rate applied to cash advances.
7. What is an annual fee on a credit card?
An annual fee is a cost you must pay each year to use certain credit cards. Not all cards carry this fee, and you should check all fees and interest rates associated with your preferred card before applying.
8. What is a minimum credit card payment?
A minimum payment is the smallest amount of money you agree to pay on a credit card balance by the due date each month under the terms of your cardholder agreement. If you do not make at least this minimum payment, you may be charged a late payment fee and a higher penalty APR.
Check the terms of your current credit card or the credit card you are considering applying for to be aware of any penalties that apply for late payments.
9. Can I use a credit card at an ATM?
You may be able to use your credit card to take out a cash advance at an ATM. However, you should know your card’s terms, including fees and interest rates for cash advances before doing this.
Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.
