Credit cards are one of the most commonly used financial products in Australia (there are around 16 million of them in circulation). They are also one of the most commonly misused and misunderstood products.
Here are some questions to help you understand what credit cards are, how they work - from applying and using them to paying them off and everything in between.
What is a credit card?
A credit card is a payment card that lets you make purchases and complete other transactions using money you borrow from the card issuer. This is usually a bank, but not always.
You essentially have access to a line of credit up to a limit for spending using your credit card. You can spend that money at stores and other physical points of sale (restaurants, coffee shops, etc.), as well as online. You can also use your credit card to pay bills through direct debit or using BPAY.
You need to pay back any money you spend using your credit card and you may be charged interest if you don’t repay the full amount due by the due date on your credit card bill.
Why would you get a credit card?
We asked more than 1,000 Australians why they chose their current credit card. Here were the main reasons:
- Low card fee (21%)
- Ability to earn rewards points for spending, like Qantas points (20%)
- Low interest rate (19%)
- Sign-up points or cashback offer (9%)
- Balance transfer offer (8%)
- Airport lounge access (5%)
- Low foreign exchange fees (5%)
- Came as part of a home loan package (4%)
How does a credit card work?
A credit card lets you borrow money from a bank to make purchases, up to a set credit limit. You receive a monthly statement and can avoid interest by paying the full balance on time. If not, interest is charged on the remaining amount.
To understand how a credit card works in more detail, it helps to think about the steps involved when applying for a credit card, then using it and paying it off:
1
Apply for a card
You apply for your credit card of choice with a bank or other provider.
2
Financial check
Your application is assessed based on your financial situation and credit history.
3
Approval and credit limit
If approved, you’ll be issued with a card with a maximum credit limit.
4
Receive and use your card
You get a physical card (unless it’s a full virtual credit card), which you can also add to your phone to ‘tap and pay’.
5
Earn rewards
Some cards allow you to earn ‘rewards’ points based on your spending.
6
Monthly statements
Every month you get a credit card statement showing your transactions and what you owe. The bill typically shows both the minimum repayment and the full amount due.
7
Avoiding interest charges
To avoid interest being charged, you need to repay the full amount when it's due.
8
Credit limit resets
With the balance paid, your full credit limit is restored and the statement cycle starts again.
Credit card vs debit card
With a debit card, you're using your own money directly from your linked transaction account. A credit card, on the other hand, lets you borrow money from the bank to make purchases, which you then repay later.
Another key difference is cost: debit cards are usually free to use, while credit cards can come with fees and interest charges – especially if you don’t pay off your balance in full.
Credit cards also come with a credit limit, meaning you can only spend up to a set amount. With a debit card, you're limited only by how much money is available in your account.
Types of credit cards
Low fee credit card
Comes with a low or no annual credit card fee, making it a budget-friendly option for those who want to access credit without paying high ongoing costs. Ideal for people who don’t use their card frequently or want to keep costs down.
Low rate credit card
Charges a relatively low rate of credit card interest on purchases, making it a good option if you tend to carry a balance. It helps reduce the cost of borrowing compared to cards with higher interest rates. Ideal for managing ongoing expenses or occasional larger purchases.
Rewards credit card
Offers the ability to earn rewards points and offers other benefits. High fees and rates usually apply to rewards credit cards. There are also cashback credit cards that earn you money which is credited to your card account instead of points.
Frequent flyer credit card
Frequent flyer credit cards offer points and benefits connected to an airline loyalty scheme. They also often come with travel related perks like airport lounge passes for the cardholder.
Balance transfer credit card
Balance transfer credit cards let you move the outstanding balance from an existing credit card to a new one - often with a low or 0% introductory interest rate for a set period. This can help you save on interest and pay off your debt faster, especially if you're carrying a balance on a high-interest card.
Business credit card
Business credit cards are available to companies for covering business expenses. There are also corporate credit cards designed for companies with a large turnover who require lots of cards for employees.
Charge card
Charge cards are very similar to credit cards, but there is no set credit limit and the cardholder must pay off the full balance each month. There are no interest charges on charge cards.
Virtual credit card
Virtual credit cards are digital versions of physical credit cards offered by some lenders. These cards provide convenience by being accessible on smartphones through apps and digital wallets. Virtual credit cards also offer enhanced security features, generating unique card numbers for each purchase, reducing the risk of fraud and unauthorised use.
How much does a credit card cost?
The cost of your credit card will depend on the type of card you choose, which credit card provider you get it from, and how you use it. Here are the main costs you’ll face:
- Interest: Applies when you don’t pay off your full balance by the due date, with charges accruing daily on the remaining amount. Credit card interest rates range from 0% - 25% or even higher on some cards.
- Annual credit card fee: Some cards have a monthly fee instead of an annual one. Card fees range from $0 - $1,400 per year.
- Cash advance fees: If you use your credit card to withdraw cash from an ATM or get cash over the counter, often with interest charged from the day of transaction. Usually $3 - $4 or about 3% of the transaction value, whichever is greater.
- Late payment fees: May apply if you don’t pay at least the minimum amount due on your credit card by the due date on your statement. Late payment fees typically range from around $10 - $20.
- International credit card transaction fees: If you make purchases overseas but some cards waive the foreign exchange fees.
Paying an annual fee is not necessarily a bad thing if it means you’re getting a lower interest rate. You might be planning to never have a balance being charged interest on your card, but if you ever do have a balance the interest rate will matter a lot.
How interest works on credit cards
You may be charged interest on your credit card depending on how you use it. Credit card interest rates are variable, which means your provider can change the rate at any time - though they usually don’t change often. The rate is shown as an annual percentage rate, such as 21.99% p.a. (per annum).
Different interest rates that can apply:
Purchase rate
This applies to money you use to pay for products and services, either in-store or online. Interest is only charged on purchases if you have not paid off your credit card in full by the due date shown on your statement.
Cash advance rate
You pay the cash advance rate on any money you withdraw at an ATM or if you transfer money from your credit card to another bank account. The cash advance rate is usually higher than the purchase rate.
Balance transfer rate
This is the rate applied to any amount you switch to your credit card from a different card. This is usually a lower rate but it reverts to a higher rate after an introductory period.
Pros and cons of credit cards
Pros
- Offers ongoing access to credit if you need it
- Can be useful for accessing money in an emergency
- Most come with extra benefits and perks
Cons
- There is usually an annual or monthly fee to pay
- The interest rates are usually quite high (e.g. compared to a personal loan)
- They can encourage people to overspend and build up debt
