Credit cards give you access to a 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 line of credit extended by a bank or other financial institution. 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 minimum payment or anything in between. If you don’t pay the full balance, you’ll carry a balance into the next billing cycle and will have to pay interest in addition to the amount you borrowed.
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.
Types of credit 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.
Some cards offer low intro APR on purchases, balance transfers or both for a set period after you open the account.
Cards with rewards may have features like cash back, points or miles earned on purchases or on select categories of purchases. Some credit cards may offer both a low intro APR and rewards.
How to get a credit card
When choosing to apply for a credit card, consider a card that fits your lifestyle and personal financial habits. Getting a credit card usually involves filling out an application where your creditworthiness will be reviewed by the credit card issuer. You must be at least 18 years old to apply. You’ll 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
- Employment status
If approved, you’ll receive your credit card with a spending limit and there may be an annual fee along with interest and fees.
Credit card preapprovals
Have you ever gotten a preapproval offer by mail or email? This 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 preapproval can mean you’ve passed the initial screening process.
However, keep in mind that you’ll still need to apply for the card. The preapproval 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.
- Balance: The total amount you owe on a credit card.
- 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 accessed 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 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 building a positive credit history and improving your creditworthiness. For example, responsible credit card use can help you start to build a positive repayment history. 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. Rewards programs can vary depending on the type of credit card you have.
Credit cards can offer a convenient way to make purchases. Instead of worrying about carrying enough cash, you can use your credit card to buy things. You can also make purchases on the internet, which is not possible with cash.
Credit cards have fraud protection measures that can help make them safe and secure to use. If fraud occurs, notify your card issuer immediately. You can typically contest the charges and have them reversed, depending on the circumstances.
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 in a way that you can’t with cash.
Some credit cards provide access to your credit score for free. Having a credit card with this feature can be a good way to 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 help improve your creditworthiness.
If you’re able to pay your bill in full each month, you can avoid interest charges and carrying revolving debt.
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 percent 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 credit limit in use. 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 statement and online account can help you track spending and provide a picture of your credit usage.
Viewing your statement and the transactions posted to your account 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, particularly one with no annual fee, continue using it somewhat regularly to help avoid getting your account closed by an issuer due to inactivity.
If the issuer closes out the card account, it can increase your credit utilization ratio by decreasing your total available credit. This can have a negative impact on your credit score. Closing the account can also affect the average age of your accounts.
Credit cards offered by Citi
The Citi Simplicity® Card, the Citi Custom CashSM Card, and the Citi® Double Cash Card can be great choices. These cards have no annual fees, which can be a good option for both first-time and experienced card users.
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, 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 going unnoticed.
2. What is a credit card limit?
A credit limit is the maximum 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. What is a current balance?
Your current balance is the amount you owe on your credit card at present.
A statement balance, on other hand, is the amount you owe on your credit card as of the last day of your last billing cycle. If you don’t pay the entirety of your statement balance each month by the due date, you may incur interest charges.
6. 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, it’s best to pay the full statement balance each month by the due date if you’re able. If you don’t make the minimum payment by the due date, it may count as a late payment. This can negatively impact your payment history and lead to late fees and higher interest rates.
7. 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.
8. 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 costs associated with your preferred card, before applying.
9. 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 credit card, or a credit card you are considering applying for to be aware of any penalties that apply for late payments.
10. 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 rules, 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.