Credit Cards 101: Basics of Credit Cards

A significant factor of the consumer economy, credit cards are an integral part of how individuals make everyday purchases.

Credit cards give you access to a revolving line of credit that can give you a larger purchasing power for expenses, and there are a number of guidelines for using them responsibly. Let’s learn more about credit card basics and how you can get started using one.

What Is A Credit Card?

A credit card allows you access to a line of credit extended by a bank or other financial institution. 

When you make a purchase with a credit card, you use your available credit to make that purchase with the agreement that you will pay back the amount credited at a later date.

If you wait to pay off your purchases included your statement balance  until after the payment due  date, interest is typically charged on these purchases. Under this circumstance, you would have to pay more for your purchase by buying it with a credit card than you would have if you made the purchase with your own money.

How Do Credit Cards Work?

When you are approved for a credit card, you are given available credit that you can then use to make purchases. With every purchase you make, you add to your existing credit card balance.

As a part of the agreement, you’ve made with your credit card issuer, you’ll make a payment by the due date each month to settle at least a minimum amount of the borrowed money you’ve used to make these purchases. 

The longer you go after the due date without paying off your purchases fully, the more interest may get tacked onto this credit balance.

Types of Credit Cards

There are many different features and types of credit cards to consider, such as cards that offer low intro APR, cards with rewards, secured cards, and unsecured cards.

Secured cards and unsecured cards refer to whether or not you need a security deposit to open an account. The security deposit on a secured card may equal the amount of your credit limit and have a minimum and maximum amount that can be deposited. 

Cards that offer low intro APR refer to low interest on purchases, balance transfers, or both for a certain period of time after opening the account. Cards with rewards may have features like cash back or miles earned on purchases or categories of purchases. Some credit cards may offer both a low intro APR and rewards.

How to Get A Credit Card

To get a credit card, you will first have to pick a card and apply for it. A good credit score increases your chance of being approved for the card. You’ll have to fill out an application. For this, you’ll need to provide personal information.

What Do You Need to Get A Credit Card

To continue through the credit card application process, you should have the necessary personal information on hand, such as:

  • full legal name
  • SSN and/or ITIN
  • mailing address
  • gross annual income
  • monthly mortgage or rent payment
  • phone number

Pre-Approved Credit Cards 

Credit card pre-approvals come from credit card issuers who want to make the process of acquiring a credit card more convenient and straightforward for the borrower.

You may, for example, receive mail from credit card companies notifying you that you are  pre-approved for a credit card, but keep in mind that you’ll still need to go through an application process, and the pre-approval does not guarantee you will be approved for the card after you apply.

When should you apply for a credit card?

When you’ve reached the minimum age of 18 that is needed to apply for a credit card, you may wonder when the best time is to apply for a card. While the answer to this question varies from person to person, you can get closer to the answer by asking yourself these questions:

  • Do you have good credit, or are you looking to build your credit?
  • Are you able to stick to a budget and afford your everyday expenses?
  • Have you already used a credit card responsibly?

If you’ve answered "yes" to these questions, it may be the right time to apply for a credit card although you should do some research to understand what kind of credit card would best fit your financial needs.

How Long Does It Take To Get Approved for A Credit Card

How long your credit card approval takes will depend on what method you’ve used to apply. Online approvals can happen almost instantly. Sending an application by mail or through the phone may take a little longer.

If your credit score is just making the cut for a credit card approval, an issuer may wish to review your application more closely, and it may take longer to approve.

Basics of Credit Cards

If you want to understand your credit card, you can break it down into a number of basic elements, such as:

  • Credit card statement: A monthly statement you receive that describes and summarizes the activity on your account including the statement balance, purchases, payments, credits, interest charges and other transactions for the billing cycle.
  • Balance payments: The payments you make each month to cover the expenses for which you’ve used the card.
  • Interest rates: Your interest rates determine how much you’ll end up paying over time for cash advances , making purchases, or initiating balance transfers. These types of transactions can have different interest rates.
  • Fees: Many credit cards have various types of fees, such as penalty fees applied to late payments and transaction fees applied to cash advances. You’ll want to understand how fees are applied before you begin using your card.
  • Cash back and other rewards: Some cards will offer cash back or other rewards for certain purchases. Know these rewards ahead of time, so you can take advantage of them whenever possible.

Credit Card vs Debit Cards:

Credit cards and debit cards are some of the most common ways customers can make purchases. While they’re often mentioned together, debit cards and credit cards function in different ways.

Debit cards work by directly transferring money from your checking account to the vendor to make the purchase. When this is done, you’ve paid off the expense entirely.

On the other hand, credit cards use a line of credit to make the initial purchase. When this is finished, you still must pay your balance on the card to pay off the expense.

Benefits of Credit Cards

There are several benefits to owning and actively using a credit card, such as:

Build your credit score

Credit cards can be a helpful tool in building a positive credit history and improving your credit score. For example, when you use a credit card responsibly, you may be able to extend your line of available credit while keeping your credit utilization low. You can also start to build a positive repayment history. You may also improve your credit mix. All these factors are weighed when calculating your credit score. 

Cash back or other rewards

Some credit cards will offer cash back, or points miles on everyday purchases. While the conditions of these rewards depend on the credit card and credit card issuer, if you familiarize yourself with these terms, you can start to earn rewards on everyday purchases.

Additionally, if you pick a card that offers rewards for purchases on an activity or vendor that you use frequently, you can start to see the benefits from using that card on those purchases.

Convenient to use 

Credit cards offer a convenient way to make purchases. Instead of worrying about carrying enough cash to cover an expense at any given time, you can use your credit card to handle the purchase.

Fraud protection

Credit cards often have fraud protection measures in place that make them safe and secure to use. If fraud does occur, you can contest the charges and have them reversed, depending on the circumstances. By using a credit card, this means you aren’t immediately putting the money in your checking account or your cash at risk.

Keeping track of your spending and credit score

Since credit cards keep track of your transactions, they can be a great tool for maintaining your expenses. You can use your monthly credit card statement to get a better picture of your spending habits in a way that you just can’t do with cash.

Some credit cards provide free credit scores. So having a credit card with this feature can also be a good way to keep up to date on your creditworthiness. 

Tips to use a credit card effectively and responsibly

If you’ve been given access to use a credit card, you should keep in mind a few things before you start making purchases.

Here are some good tips for using a credit card responsibly:

Pay your bill on time and in full every month

Paying your credit card bill on time is vital to responsible credit card usage. Not only can it help keep your credit debt from building up, but it also can help you develop and maintain a positive repayment history. This can improve your credit score, which may increase your chances of getting approved for credit cards with better interest rates over time.

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 available credit, you can improve what’s known as your “credit utilization ratio,” which is the amount of credit you’ve used divided by your total credit limit. This can also help you improve your credit score over time.

Wait six months between credit card applications

While it might seem that applying for multiple credit cards at one time will give you a higher chance of your applications being accepted, doing so may actually hurt your credit score. This can make it even harder to get approved for a credit card in the future.

When you apply for a credit card, the issuer will perform a “hard inquiry” into your credit file. This can mean that your credit score will take a small dip. Although a single application’s hard inquiry won’t damage your score too much, hard inquiries resulting from multiple applications can make a more significant dent in your score. With this in mind, as a general rule, it’s better to wait at least six months between credit card applications to avoid hurting your credit score too much. Remember, though, that this period of time can vary depending on other factors such as whether you have excellent, average, or poor credit.

Review your credit card statement and account online to track spending and avoid fraud

Always check your credit card statement and account online. This will give you a picture of your credit usage.

Viewing your credit card statement and the transactions posted on your account online can alert you to any fees or interest charges that you may need to address. It will also let you track any suspicious activity on your account and alert you to possible fraud.

Consider keeping credit card accounts with no annual fees open and active to avoid hurting your credit score

If you have a credit card with no annual fee, then it can be a good idea to use it somewhat regularly to prevent the issuer from closing the account.

If the issuer closes out the card account, it can increase your credit utilization ratio since you have less available credit. This can have a negative impact on your credit score.

Credit Cards Offered By Citi

The Citi Simplicity® Card, the Citi Custom CashSM Card, and the Citi® Double Cash Card are great choices for credit cards. These cards have no annual fees, which can be a good option for both first-time and experienced card users. The Citi Custom CashSM Card and Citi® Double Cash Card also offer cash back on purchases. These cards can get you started with all the financial flexibility that a credit card can offer.

Frequently Asked Questions

1. What happens if I don’t use my credit card?

If you do not use your credit card, you could be at risk of having your card issuer close your account. Additionally, if you do not use your card, you probably will not be monitoring its usage, which could leave you more susceptible to fraud. A closed account could damage your credit score, as it may lower your amount of available credit, which could then increase your credit utilization ratio.

2. What is a credit card limit?

A credit limit is the highest amount of credit you could use on a given card. In general, responsible credit card usage dictates that you stay well below this given limit when charging expenses to your card.

3. How do I increase my credit card limit?

Your credit limit may be able to be increased if you pay your bills on time each month and do not use all your given credit. Once you’ve established a positive payment history and refrained from maxing out your credit, your lender may  assess whether to increase your credit limit.

4. What is an APR?

An APR for a credit card is that card’s yearly interest rate. Different rates can apply to different balances on your card account. Your account, for example, may have an APR on purchases and a separate, higher APR on cash advances. 

5. What does a current balance mean on a credit card?

A current balance is the amount you owe on your credit card at the present time. 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 credit card statement that will summarize your credit card usage and statement balance, along with a minimum payment due date. To avoid interest, it’s best to pay the full statement balance each month by the due date if you are able. You should at least pay the minimum amount by the due date to avoid late payments, since they negatively impact your payment history and can lead to late fees and higher interest rates being charged to your account.

7. How does credit card interest work?

Whenever you do not pay your statement balance in full each month by the due date, your credit card issuer will typically charge interest on the portion of the balance not paid. The amount of interest increases the longer you go without paying the balance in full. 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 the annual fee on a credit card?

An annual fee is a charge that your card provider issues as a yearly expense for using your credit card. Not all cards carry this fee, and you should check if your preferred card has one before applying.

9. What is the minimum payment on a credit card?

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 agreement with the card issuer. If you do not make at least this minimum payment, you may  be charged a late payment fee and a higher penalty APR. You should 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 at an ATM to take out a cash advance. However, you should know your card’s rules, fees, and interest rates for cash advances before using your credit card in this manner.

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.

Additional Resources

Utilize these resources to help you assess your current finances & plan for the future.

Learn how FICO® Scores are determined, why they matter and more.

Review financial terms & definitions to help you better understand credit & finances.