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How does a credit card work?

A credit card is a line of credit that you can use for spending. If you get one, you'll get a statement each month that tells you the amount you owe for the billing period. You can choose to pay the entire amount owed or a portion of it - there will be a minimum repayment each billing period that’s typically around 2-3% of the total owed.

Unlike a personal loan which you pay off over a fixed term, a credit card can be used on an ongoing basis.

Credit cards are not bank debit cards, which are the cards you use to access the available funds in your bank account.

Should I get a credit card?

Credit cards can help boost your credit rating, be used all over the world, and provide funds when you’re short on cash or in an emergency. However, these handy pieces of plastic do come with risks, and can be expensive if you choose one that isn’t right for you and you don’t make your repayments on time.

That’s why you should know the conditions attached to a credit card as well as its benefits. You should also consider your own spending habits and how you’ll pay off a credit card.

We’ve outlined some advantages and disadvantages of using a credit card below.

Types of credit cards

Frequent Flyer & Travel Cards · See All

Frequent flyer or travel credit cards are designed for those who want to get rewards for their spending that can be redeemed for flights, upgrades, and other travel perks.

If you’re in the market for one of these, check the fine print to see whether the conditions of the card make it a good fit for you.

Look for things like:

• The frequent flyer program the card is attached to.
• Expiration dates on points earned.
• Whether points you earn can be transferred to a different frequent flyer program.

Rewards Credit Cards · See All

Rewards credit cards allow you to earn points for every eligible dollar spent on it. These rewards can then be redeemed for things like vouchers, entertainment tickets, flights or flight upgrades, and cash back (this gives you a certain percentage, usually around 5%, of what you spend back into your account).

Credit cards with rewards programs typically have higher interest rates and more fees attached to them.

Balance Transfer Cards · See All

A balance transfer card lets you transfer the balance (the amount you owe) of one credit card to another.

The new interest rate is usually 0% or a low rate for a limited period of time. If you can pay off the balance within that time, then you may save money, however you may end up paying more if you can’t.

A balance transfer card isn’t necessarily the best option for those struggling to meet their credit card repayments. You can read more about getting your debt under control at the Australian government’s Moneysmart website.

What to consider when choosing a credit card

Minimum repayments

You should work out how much you can afford to pay off each month to find a suitable loan. If you can pay the full balance each month, then consider looking for a credit card with many interest-free days so you don’t pay interest as long as you pay the balance within this period. This may be worth the higher interest rate and annual or monthly fee.

The benefits of paying more than the minimum

Paying more than the minimum monthly repayment means you can reduce the amount of interest you pay. Even paying slightly more than the minimum per month can make a big difference.

Credit limit

When you apply for a credit card, you'll be offered a credit limit by the bank or credit provider. This is the maximum amount they will lend you. You don’t have to take the maximum amount on offer, so think about your spending and what you can afford to pay back before deciding on a credit limit.

Interest rates

How much interest you’ll pay will depend on the type of credit card, the transactions you make (for example, interest rates will vary for regular purchases, balance transfers, and cash advances), and when you make repayments.

Credit cards also sometimes have these two different interest rates:

• Introductory interest rate: an interest rate that’s offered for a limited amount of time - not all credit cards offer this.
• Purchase interest rate: the interest rate on purchases you make after the introductory (or honeymoon) period ends.

Interest-free period

A lot of credit cards come with an interest-free period, so you’re not charged interest on purchases made during that period, as long as you pay the outstanding balance in full by your monthly due dates. However, these cards may stil incur monthly or other fees during the interest-free period.

‘Interest-free’ credit cards often have interest-free periods of at least 55 days or at least 44 days.

Fees

Most credit cards have fees attached to them, such as:

• Annual or monthly fee: a fee charged every year or every month. You can also find credit cards with no annual fee.
• Late fee: for if you don’t make your minimum repayment, plus any overdue amount, by the monthly due date.
• Cash advance fee: this is charged if you withdraw money from your credit card.
• Overlimit fee: a fee charged if you go over your credit limit.
• Lost or replacement card fee: when you need a replacement card delivered to you.

Ensure that you look closely at the fees of any credit card you’re considering, as these will often be higher if you opt for a credit card with special perks.

Benefits

Some credit cards come with benefits, such as:

• Complimentary travel insurance.
• Bonus points when you sign up.
• A reduced annual fee for your first year.
• No foreign transaction fee, meaning charges for purchases or transactions you make overseas are waived.
• A cashback offer, which is when a small percentage of the amount spent on certain purchases is refunded back into your account.
• Travel credit, to be used for eligible flights, hotels, and car hire.

The bottom line

A credit card can be a useful thing to have as long as you use and manage it responsibly. If you pay your balance off in full every billing period, then it can provide you with benefits and rewards that won’t cost you more than they’re worth.

Any credit card comparison you do should consider interest rates, fees, and benefits, but you should first do your research and think about whether getting one in the first place is the right choice for you.