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Credit Card Basics: All the Information You Need to Know

Understanding the basics of credit is an integral part of getting your first credit card.

A senior woman using her credit card while holding her cell phone in the living room of a house
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Credit cards are valuable tools for building credit, but searching for the right card and getting approved can be a stressful venture. If you're new to the world of credit, you might need help figuring out where to start or understanding how they work. A little research can go a long way before applying for a credit card, so here's what you need to know. 

What is a credit card?

Credit cards are financial tools with revolving lines of credit primarily used to make purchases: You can buy something now and pay for it later. Your credit card issuer determines your credit limit upon approval, and from there, you can borrow against your credit limit to make purchases. You won't have to worry about interest charges as long as you pay your balance in full and on time every month. While it can be easy to slip into debt if you don't practice discipline, many credit cards offer cardholder benefits like cash-back rewards, balance transfers, travel perks and purchase protections.

Credit card basics

The information embedded on your credit card serves an essential purpose -- to identify the account holder. It's best to understand what this information means and where to find it, so here are some key pieces to look out for on your credit card:

Credit card number

A credit card number is the 15- or 16-digit number printed on the front (or sometimes on the back) of your credit card. This number is used to identify the card and account holder and has several security features embedded in it. 

Cardholder name

Along with the credit card number, you will find the cardholder's name printed on the credit card. The name should match a government-issued ID associated with the cardholder. 

Expiration date

Every credit card has an expiration date to provide an extra layer of protection. This date is typically found between the card number and the cardholder's name on the front of the card and may be required to complete online transactions. 

CVV

Card Verification Value, or CVV, is a three- or four-digit number printed on the front or back of your credit card. A CVV protects cardholders during card-not-present transactions because this unique number verifies that the person making a transaction is the cardholder. 

Account information

Your credit card account holds everything you'll need to make payments, stay updated on recent transactions and credits, and redeem rewards. Familiarize yourself with these details of your credit card account.

Statement balance

Your credit card statement balance includes all the transactions and payments made during your most recent billing cycle. Paying your statement balance off on time and in full is the best way to avoid paying interest. 

Current balance

Your current balance is the total amount of purchases, credits, interest and fees you've accumulated since your last statement. This is a real-time view of what you owe on your credit card and will update every time you swipe your credit card.

Credit limit

A credit limit is the maximum amount of money you can borrow on a credit card. Your credit limit is based on your creditworthiness and the terms of your credit card agreement. Before opening a new credit card, look at the credit limit and make sure it fits your needs. It's best to use no more than 30% of your credit limit at a time to maintain a healthy credit score. This is known as your credit utilization ratio, and it is the amount of credit you're using compared to the amount of credit you have available. 

Billing cycle

A billing cycle is the amount of time between the last statement closing date and the next. Each credit card has a billing cycle that lasts between 28 and 30 days. But according to the CARD Act, your due date must be at least 21 days from the end of your billing cycle. 

Cash advance

When you withdraw money from your credit card account, it's known as a cash advance. Credit card companies often charge higher interest rates for cash advances than purchases, and interest begins accruing immediately. There are usually additional fees involved, too. 

Grace period

Credit card companies offer a grace period between the end of a billing cycle and when your bill is due. During this time, you won't face interest charges. However, if you don't pay off your statement balance on time and in full, that balance will begin to accrue interest immediately after your due date.

Minimum payment 

The minimum payment is the lowest amount you can pay toward your credit card balance to keep your account in good standing. If you can't pay your balance in full, making at least your minimum payment is important to avoid late fees and penalties. 

Rewards rate

Some of the best rewards credit cards earn you cash back, points or miles on nearly every transaction. It's important to pick a credit card that offers rewards that match your spending habits to best maximize your budget. 

Balance transfer

balance transfer allows you to move one or more high-interest balances to a new card with a lower APR. Some of the best balance transfer credit cards offer introductory 0% APR periods on their balances -- usually for 12 to 21 months. Balance transfers can be an excellent tool for consolidating and paying down high-interest debt. 

Costs of carrying a credit card

Credit cards can cost you if you aren't careful, but responsible use makes most fees avoidable. Look out for the following: 

APR

Annual percentage rate, or APR, is the interest rate you're charged if you don't pay off your credit card balance in full each billing cycle. Based on the prime rate, APRs might be fixed or variable. If you carry a balance from month to month, you'll accrue interest based on your APR. While you can avoid fees and interest by paying off your card in full each month, credit card interest is often significantly higher than other types of loans and can quickly add up. 

Foreign transaction fees

Depending on the card, there may be foreign transaction fees -- an additional fee charged for making purchases outside the US. Foreign transaction fees are typically 3% of the transaction and add up quickly, but there are credit cards without foreign transaction fees

Annual fees

A card with an annual fee means there is a cost that you'll have to pay each year you have the credit card. However, some cards with annual fees include higher reward rates or better perks. Understand that your first credit card can help or hurt your credit score, and if you commit to a card with an annual fee but can't keep up, your credit score will be impacted. Annual fees typically range from $95 to sometimes greater than $600, but some credit cards have no annual fee.

Late payment fees

If you miss a payment on your credit card, you'll be charged a late payment fee. Some issuers lower the late payment fee the first time you miss a payment, but this isn't always the case. Late payments may cost you anywhere from $20 to $40. 

Balance transfer fees

Balance transfer credit cards typically charge a fee between 3% and 5% of the transferred balance. However, there are a handful of credit cards with no balance transfer fees to encourage cardholders to transfer a balance. 

The bottom line

Credit cards can help you build credit and earn rewards, but they bring a whirlwind of financial trouble when misused. To avoid falling into debt or financial distress, ensure you understand your credit card's terms so you can avoid surprises later on. 

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