A credit card can be an effective tool for making purchases, simplifying your finances and even smoothing out your cash flow. But before signing up to one, it’s a good idea to get familiar with just how they work.
Types of cards
Broadly, there are four different types of credit cards
Interest-free: This type of card may best suit those who are new to credit and want more control over their finances. Interest-free cards generally offer a simple monthly fee based on the card limit so there are no complex fees and pricing structures.
Low Fee: These tend to be suited to those who want a credit card for the convenience and are confident they’ll be able to pay back their balance in full each month. They attract a higher rate of interest than some other card types.
Low Rate: Low-rate credit cards typically have a lower purchase interest rate than some other cards. These cards are suited to those who expect they’ll carry over a balance from month to month rather than paying it off in full, and would like to minimise the interest they’ll pay on this balance. They have a higher annual fee than some of our other card types.
Awards: Awards cards allow you to earn awards points as you spend. You can spend these points on travel, gifts and even get cash back. They have a higher annual fee and interest rate than some of our other card types.
Credit cards require you to make repayments each month while there is an amount owing. You can choose to make the minimum payment as shown on your statement, or pay your balance in full. You can also pay off an amount somewhere in between those two amounts. Keep in mind that the more you pay off, the less interest you’ll pay.
Balance transfers and cash advances
A balance transfer allows you to transfer a balance from an existing card with another issuer onto a new credit card. With a new card you’ll typically be offered an introductory period with a low-interest rate, which can help you save interest. When the introductory balance transfer rate finishes, the outstanding balance (including any related interest) will be treated as a cash advance and charged interest at the cash advance interest rates.
You can also withdraw money from some credit cards; this is known as a cash advance1. Bear in mind that you’ll be charged a fee as well as higher interest at the cash advance rate on the amount you withdraw.
Credit cards have a number of fees associated with them, including annual fees, monthly fees, cash advance fees, late payment fees and international transaction fees. Before taking out any card, make sure you’re across all of these fees that may apply and have budgeted for any you may incur.
Credit card benefits
A credit card provides access to funds up to an agreed limit which you’ll continue to have access to provided you make the minimum payment by the due date each month.
Credit cards let you carry less cash and buy things over the phone or online, and can be useful if, for example, you have to make a purchase before payday.
Credit card trade-offs
If you don’t repay your balance in full every month you will be charged interest in addition to any fees that may apply. Additionally, some cards do not allow for balance transfers or cash advances. While it can be convenient to use a credit card, it is money that you will have to repay and it’s important to keep this in mind.