20 basics everyone should know
Credit cards are one of the most commonly used financial products in Australia (there are around 17 million of them in circulation). They are also one of the most commonly misused and misunderstood products.
Here we answer 20 questions to help you understand exactly what credit cards are, how they work when you’re applying, using them, paying them off, and everything in between.
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 every time you get a credit card bill.
To understand how a credit card works, it helps to think about the steps involved when applying for a credit card, then using it and paying it off:
With a debit card, you're spending your own money from your bank account. With a credit card, you're spending the bank's money then paying it back. Another difference is cost. Debit cards are free to use in most instances, but your bank will charge you to use a credit card, if you let them.
Brad Kelly, Money.com.au credit card expert
Here are some of the reasons people get a credit card. It can also be a mixture of reasons.
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:
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.
Brad Kelly, Money.com.au credit card expert
Credit card users can be charged interest by their provider depending on how they use their card.
Credit card interest rates are variable, meaning the provider can change your interest rate at any time, although they tend to not change very often. The rate is expressed as an annual percentage rate – e.g. 21.99% p.a. (per annum).
There are a few different interest rates that can apply:
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.
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.
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.
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
There is usually an annual 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
The interest free period on a credit card is the maximum number of days following a purchase during which you won’t be charged interest. Most credit cards offer an interest-free period and it’s usually 44 or 55 days. Some credit cards offer up to 110 interest free days.
The interest-free period resets at the start of each statement period and count down from there. For example, if your credit card offers 55 interest free days and you make a purchase 5 days into the statement period, you would have 50 remaining interest free days on that purchase.
If you don’t repay your balance on your statement in full by the due date (i.e. the end of the interest free period) the card provider will begin to charge you interest on the remaining balance until it’s paid off. You will also lose your interest-free days, meaning you will be charged interest on any new purchases immediately.
There are no interest-free days for cash advances or on balances transferred from another card.
Yes you can withdraw cash from an ATM with most credit cards. But this can be an extremely expensive way to access cash because of how these transactions – known as a cash advance – are treated by credit card companies. More on this below.
A credit card cash advance is any transaction that involves accessing cash or transactions that are considered to be the equivalent of accessing cash.
The main examples are:
A cash advances is generally the most expensive way you can use your credit card because of the interest and fees that apply:
There is usually a ‘cash advance’ fee which is either a set amount per withdrawal or a percentage of the amount withdrawn. There will often be an additional cost if you withdraw cash using an overseas ATM. You will be charged interest immediately on the amount you withdraw, as there are no interest-free days on cash advances.
The interest rate on cash advances is usually higher than the purchase rate, which is itself usually quite high on credit cards.
A balance transfer is a feature offered on some credit cards allowing you to move the balance of a different credit card onto the new card.
There is usually a promotional interest rate applied to the amount you transfer over for a limited period of time. For this reason a balance transfer is commonly used as a way to pay down credit card debt faster as there is no or little interest accumulating during the offer period.
However, if you don’t pay off the balance in full during the interest-free period, the interest rate will revert to a higher interest rate (often the card’s cash advance rate). On most cards there are also no interest-free days on new purchases during the balance transfer period.
The instructions for paying off your credit card will be shown on your credit card statement. Usually you can pay through a bank transfer, BPAY, telephone banking or you may be able to set up an ‘autopay’ meaning the full balance will be debited from your chosen bank account automatically.
When paying off your credit card, you technically only need to pay off the minimum. This is usually around 2.5% of the total amount owing. However, if you do this you will start to be charged interest. It could take you years and cost you many multiples of your initial balance in interest if you only make the minimum payment.
Your credit card limit is the maximum amount you can borrow using your credit card. The limit is set when you are approved for your card, based on your income, expenses, credit history and other factors relating to your finance.
Bear in mind that if you need to increase your credit limit after you have been approved you typically need to go through another credit check.
Something a lot of people don’t realise is that it’s your credit card limit, and not your current balance, that lenders consider when assessing you for new credit applications. That means that having a very high credit limit on your credit card could make it harder to be approved for a loan in future.
The eligibility criteria for credit cards vary from one provider to another but in most cases the requirements are that you:
You should be able to avoid paying interest on your credit card if you:
If you don’t think you’ll be able to avoid interest completely, choosing a credit card with the lowest interest rate possible is probably the next best thing.
A good credit card is the one that best suits your needs and spending habits.
The most simple way of thing about is this:
Pretty much every bank and credit union in Australia offers credit cards. You can also get a credit card from specialist credit card providers, like American express. Overall, there are around 50 credit card providers in Australia.
To cancel a credit card, you’ll need to repay any money owing and cancel any scheduled payments, like direct debits for subscriptions or regular bills.
Then you can submit a request to close your account. You can usually do this online or using your bank’s mobile app, or you can do it over the phone or at a branch if your bank has one nearby.
Bear in mind there is a difference between cancelling a credit card and fully closing your account. If you cancel your card, your current card (and those of any additional cardholders) will stop working but your account will remain open. If you close your account, you need to pay the account off in full and it will be closed off completely.
Credit cards are generally a safe way to make purchases, provided you are careful with how you use the card and don’t share your card details with anyone unless it’s for a genuine payment.
Most credit card providers use sophisticated fraud prevention techniques to minimise credit card fraud. After all, as a borrower, it’s their money on the line.