{"id":254,"date":"2022-10-20T15:10:19","date_gmt":"2022-10-20T15:10:19","guid":{"rendered":"https:\/\/www.nerdwallet.com\/au\/?page_id=254"},"modified":"2024-03-29T20:01:03","modified_gmt":"2024-03-29T20:01:03","slug":"how-do-credit-cards-work","status":"publish","type":"page","link":"https:\/\/www.nerdwallet.com\/au\/credit-cards\/how-do-credit-cards-work","title":{"rendered":"How Do Credit Cards Work?"},"content":{"rendered":"\n

Credit cards are a popular payment method used around the world. There are various types of credit cards available, such as rewards cards, low interest cards and cards with premium perks. <\/p>\n\n\n\n

But while credit cards have their benefits, they can also lead to debt. In July of 2023, there were roughly $12.6 million personal credit card accounts in Australia, according to data from the Reserve Bank of Australia. And, on average, there was approximately $1,110 of debt per card accumulating interest.<\/p>\n\n\n\n

Credit card debt can spiral out of control, so it\u2019s important to understand how credit cards work before you start swiping. <\/p>\n\n\n\n

What is a credit card?<\/h2>\n\n\n\n

Many Aussies have at least two cards in their wallets: a debit card and a credit card. <\/p>\n\n\n\n

Debit cards are linked to your bank account. When you use a debit card, it takes money directly from your account. <\/p>\n\n\n\n

A credit card, on the other hand, is a revolving line of credit issued by a bank or financial institution. When you use a credit card, you\u2019re using the issuer\u2019s money, which you then have to pay back or be charged interest on the balance. <\/p>\n\n\n\n

Credit limit<\/h3>\n\n\n\n

The credit limit is the amount you are allowed to charge to the card, and is set by the issuer. Issuers use your credit history, among other factors, to determine the card\u2019s credit limit. <\/p>\n\n\n\n

When you use the card, the available credit decreases. When you pay off the amount you borrowed, the available credit goes back up. For example, if your card has a credit limit of $5,000, you can charge up to $5,000 to the card. If you spend $4,000, you\u2019ll only have $1,000 of credit available. If you pay off the balance, you\u2019ll have the full $4,000 available again. <\/p>\n\n\n\n

Transactions<\/a> can stay on your account as \u2018pending\u2019 for a few days, and may not be reflected in your available credit. Your balance may appear to be -$1,000, for example, but a pending $250 charge means the real balance is $-1,250.<\/p>\n\n\n\n

Double-check your statement before you use the card so you know exactly how much credit you have available. Going over your credit limit can lead to declined transactions, and you may be charged an overlimit fee. <\/p>\n\n\n\n

Credit card interest rates<\/h3>\n\n\n\n

At the end of each billing cycle, you must pay off the balance to avoid being charged interest. Credit card interest rates<\/a> \u2014 often referred to as APR \u2014 can be high (around 20%), so you want to settle the bill in full, if possible. <\/p>\n\n\n\n

Minimum payments<\/h3>\n\n\n\n

Minimum payments<\/a> are the lowest amount you can pay back to keep the account in good standing. It\u2019s typically a percentage of the balance, such as 2%. Failure to pay at least the minimum payment can result in fees and penalties.  <\/p>\n\n\n\n

If you can, always pay more than the minimum payment so you can clear the debt faster.<\/p>\n\n\n\n

When to get a credit card<\/h2>\n\n\n\n

Before you get a credit card<\/a>, consider what you\u2019ll be using it for and why. For example, you may want a card to help you build your credit \u2014 using the card responsibly over time can show lenders that you\u2019re a trustworthy borrower.<\/p>\n\n\n\n

Alternatively, you may want to take advantage of the rewards that some cards offer, such as travel points. Weigh up the cost of the card and the value of the rewards before you apply \u2014 if you don\u2019t use the card regularly, you may not earn enough points to make the annual fee worth it.  <\/p>\n\n\n\n

Another popular reason to get a credit card is for emergency purchases. If an unavoidable bill falls on your lap, a credit card can help you pay it quickly. However, while you may avoid late fees on the bill, you\u2019ll incur interest on the credit card if you don\u2019t pay off the balance. <\/p>\n\n\n\n

Getting your first credit card?<\/strong> Whether you\u2019re a beginner or a credit card pro, make sure you know how to handle a credit card responsibly<\/a>. It\u2019ll save you time, money and frustration.<\/p>\n\n\n\n

How do different types of credit cards work?<\/h2>\n\n\n\n

There are various types of credit cards<\/a> available, each with unique pros and cons. <\/p>\n\n\n\n

Here are a few of the popular types: <\/p>\n\n\n\n

Low interest cards:<\/strong> A great option for consumers new to credit, these cards charge a low, ongoing interest rate and typically have low fees. <\/p>\n\n\n\n

Premium cards:<\/strong> If you want high-end perks and extensive insurance extras, you may want to consider a premium card. However, these cards typically come with a hefty annual fee. <\/p>\n\n\n\n

Frequent flyer cards:<\/strong> Earn thousands of frequent flyer and reward points simply by signing up for certain credit cards. You can then use those points to pay for flights, hotels and more. <\/p>\n\n\n\n

0% interest cards<\/strong>: Balance transfer cards<\/a> usually come with a 0% interest introductory offer for a set period of time, then move to a standard rate. These cards can help move your debt to a card without interest to help you get ahead with repayments. <\/p>\n\n\n\n

No annual fee cards<\/strong>: Some credit cards do not charge an annual fee, but the perks and benefits may not be as extensive as the ones that do. <\/p>\n\n\n\n

Business cards:<\/strong> Many issuers offer cards specially designed for businesses. You can use a business card<\/a> to track business-only outgoings, and provide cards for employees.  <\/p>\n\n\n\n

Reward program cards:<\/strong> Rewards cards allow you to earn points with every dollar you spend. Once you\u2019ve earned enough points, you can redeem them for products and services. <\/p>\n\n\n\n

Store cards: <\/strong> These cards are offered by brands and large retailers, and can come with higher interest rates than standard credit cards. Some store cards can only be used in the parent store, while some can be used outside of the store for everyday spending. <\/p>\n\n\n\n

Credit card fees and features<\/h2>\n\n\n\n

Using a credit card responsibly is about more than paying it off in time, every month. Understanding what credit card fees<\/a> may apply can help you avoid unnecessary penalties. Keep these fees and features in mind when shopping for a credit card. <\/p>\n\n\n\n