The ultimate guide to credit cards for beginners

The ultimate guide to credit cards for beginners

  • Find out what credit cards are, how they began, and what they can do for you.
  • Discover what kinds of cards are available, and the range of rewarding extra features you can choose from.
  • Learn the Who, When and How of applying for and using a credit card.

How do you choose the right credit card?

Stack of credit cards

When you’re right at the beginning of your personal finance journey – perhaps you’ve just landed your first job, or are about to kick off at uni – owning a credit card can seem like a tempting prospect, but at the same time bewildering because there are so many options to choose from and multiple decisions to make.

Or perhaps you’re not a financial beginner, but you’re not sure what a credit card could actually do for you, so you’ve never felt the need for one and are not sure where to start and how to compare them.

Whichever stage you’re at, we understand your dilemma. This guide is for you.

What exactly is a credit card?

A credit card is a simple way in which a person or business can borrow money as and when they need it, without having to draw down a fixed amount all at once, with the lender able to charge interest if the loan is not repaid by an agreed date. The loan is made when the cardholder uses the credit card to make retail purchases or pay bills, or to withdraw cash. Generally, the cardholder is given an interest-free period covering both purchases and bill payments. This means that if they repay the lender for all their transactions on the agreed due date (usually between 10 and 25 days after the end of the monthly billing cycle), they are not charged interest on the amounts they have temporarily “borrowed”.

If a cardholder doesn’t repay the total amount of their monthly purchases and bill payments on the due date, they are charged interest on any overdue balance, with the interest being added to the balance owing. The cardholder can still continue to use their card – up to the agreed credit limit set by the lender – but interest will now be charged on each purchase or bill payment starting from the date of the transaction. That is, the interest-free period is forfeited if there is a balance unpaid beyond the due date.

For withdrawals in cash from the card (‘cash advances’) there are no interest-free days. Interest is always charged from the transaction date until fully repaid.

All credit cards, even those advertised as ‘low rate or ‘low interest’, charge interest at rates far higher than home loan rates (where the lender has a lower risk because the loan is secured against the property value), and the interest on some cards can be as high as 21% p.a. But for cardholders who repay their balance in full every month, a credit card is not only a convenient way to pay but also similar to an interest-free revolving line of credit.

When did credit cards begin?

Vintage credit card advertisements

The first credit cards created were for the Diners Club in 1950, followed a few years later by American Express, although they were in fact charge cards. Visa’s predecessor – the  1958 BankAmericard – was the first true credit card with extended payment options.

Credit cards now service a wide range of needs

Credit cards have evolved into a potentially sophisticated financial tool, many with perks and complimentary benefits. You can find cards with specific features by clicking the ‘Features’ option at the top of every page on our website. The choices available include:

  • Rewards points credit cards

If you choose a rewards credit card you can earn loyalty points on your purchases and bill payments (e.g. 1 point per dollar spent with the card). These points can later be exchanged for merchandise, retail gift vouchers or even cashback against your credit card account or supermarket shopping.

Some cards allow points to be earned in airline frequent flyer programs, and many other reward programs allow points to be converted into frequent flyer points. Airline points are usually more valuable if redeemed for premium airfares or upgrades.

Many cards offer large numbers of bonus points to new cardholders who meet a preliminary spending target.

Watch out for points earning limits – monthly or annual spending thresholds, beyond which the points earning rate drops (e.g. from 1 point to 0.5 points per dollar) or monthly or annual spending caps (beyond which the rate drops to 0 points per dollar). Some cards may have specific purchase types which are excluded from points earning (e.g. payments to the government).

  • Balance transfer credit cards

Many credit cards allow you to transfer to them a balance owing on another card. You might do this to access a lower interest rate on a new card. The most popular form of balance transfer occurs when new cardholders take up a zero-interest balance transfer offer, allowing them to defer repayment of the balance without incurring interest. The interest-free period can be as long as 26 months, and during that time the only requirement is to make a minimum monthly repayment (e.g. 2% of the balance).

Motives for taking up a balance transfer offer include saving interest on overdue credit card debt (where the cardholder may be paying interest of over 20% p.a.), or debt consolidation, or – where a cardholder could actually afford to repay a major purchase balance – earning interest by putting the repayments in a savings or mortgage offset account instead.

However, there are some drawbacks. Some cards charge an upfront credit establishment fee on balance transfers (e.g. 2% of the amount transferred). In most cases, you will forfeit your interest-free days on purchases until the transferred balance is fully repaid. And if you fail to repay your balance in full at the end of the interest-free or low-interest period, the revert interest rate will be the card’s interest rate on overdue purchases, or the often higher cash advance interest rate.

  • Purchase interest rate offer cards

Some cards will offer introductory interest-free periods on purchases to new cardholders (e.g. 12 months at 0% p.a.). This can be particularly useful if it’s combined with a zero-interest balance transfer offer, since you won’t lose your interest-free days on purchases while the offer lasts. (But make a note of both offer expiry dates, since the purchases offer could expire before the balance transfer offer.)

A zero-interest offer on purchases can be a real help, giving you extra time to pay for planned major expenditure. But avoid the trap of spending more than can afford to repay when the offer period ends, since you’ll once again be looking at a high interest rate on your credit card debt.

  • No annual fee credit cards

Most card issuers have in their range at least one card which can be yours without paying an annual fee. These are usually – but not always – ‘no frills’ cards, with no rewards points or attached complimentary benefits, and they will often have interest rates just as high as cards with rewards and benefits. They are ideal for keeping in your wallet for emergencies, or as an extra card to use for particular features, since there is no holding cost.

Exceptions to the ‘no frills’ rule include the 28 Degrees Platinum Mastercard (no foreign transaction fees, free global Wi-Fi), the Coles No Annual Fee Mastercard (earn flybuys points), the ME frank Credit Card and ING Direct Orange One Credit Card (low interest rates), the American Express Velocity Escape Card and Qantas American Express Discovery Credit Card (frequent flyer points) and the American Express Essential Credit Card (rewards points).

  • Cashback credit cards

Some cards reward new cardholders with a percentage of their first purchases as a cashback on their credit card account. The cashback period is usually limited to the first few months, and the amount is often capped. Other cards deliver cashback in the form of an annual voucher or credit to use for travel or flights with the card issuer or partner airline. And some cards, such as the HSBC Platinum Credit Card, rebate the annual fee every year when a spending target is reached.

  • Low interest rate cards

‘Low interest’ is a relative term when applied to credit cards. All low interest credit cards have rates much higher than home loan interest rates and most personal loan interest rates. The best way to use a credit card is to take advantage of interest-free days and any rewards points or complimentary benefits, but pay off the whole balance each month to avoid interest charges.

However, a low-interest credit card can be useful for anyone with a seasonal or unpredictable income (e.g. casual workers, freelancers, students) or for smoothing out expenditure peaks (quarterly or annual bills, Christmas, holidays) over the whole year. But low-interest credit cards shouldn’t be regarded as a long-term debt solution.

Other features to consider when choosing a credit card

Model plane flying over a map

Some credit card features are common to different types of cards, so as well as deciding which of the above kinds of card you need, you also need to consider which extra features you would like your card to have. Some of these (e.g. travel insurance) are described as ‘complimentary benefits’, although you will often pay for them, at least partly, in the form of a higher annual fee.

You can find cards with these extra features by clicking the ‘Features’ option at the top of every page on our website, and then selecting ‘All features’ in the far right column. These are some of the features to look out for:

  • Travel insurance

Complimentary travel insurance is usually (but not always) found attached to platinum or higher level rewards cards. Types of insurance include overseas travel cover, interstate flight inconvenience policies and transit accident insurance. Read the small print to find out who’s covered and how to activate the policy though fare purchases or other travel expenditure on your card. It’s worth following the link to the policy’s Product Disclosure Statement to check the other Terms & Conditions.

  • Shopper’s insurance

This is a blanket term covering extended warranty insurance, purchase protection cover, lowest price guarantee schemes and refund protection. None of these free policies is essential, but if you have them it’s comforting to know they’re there.

  • Airport lounge access

Premium rewards cards, especially those aimed at regular travellers, will often award airport lounge passes to cardholders. For cards with a very high annual fee this could involve full membership of one or more lounge programs, with unrestricted access, but on lesser cards you’re more likely to receive two single-visit lounge passes annually.

  • No foreign transaction fees

Most cards charge a fee of between 2% and 3.5% for converting foreign currency to Australian dollars and/or processing payments to merchants located overseas. Your payment in AUD when shopping online is not a guarantee that the merchant is located in Australia. The few cards which don’t charge foreign transaction fees are good for frequent online shoppers or overseas travellers.

  • Pay using your smartphone

Some cards have all three of Samsung Pay, Apple Pay and Google Pay, but a surprising number have either one or none. Check carefully if this is important to you.

  • Instant approval

Many cards promise ‘instant approval’ or ‘60 second approval’ of your application. In practice, if you have a reasonable credit rating you will get a speedy response online, but in fact it means that the bank has conditionally approved your application, pending proof of your income and existing debt and expenses.

Meet the minimum criteria before you apply

It’s vital to make sure that you meet the minimum criteria before you start your card application, otherwise you’ll be knocked back immediately. Minimum criteria vary from card to card, but cover points like your age, citizenship or residency status, your income, and possibly other details. If you have chosen a card on our site that suits you, make sure you check the eligibility criteria by clicking on the ‘Eligibility’ tab, which appears on the far right, immediately beneath the card image and summary details.

Who should apply for a credit card?

Man pointing at himself

A credit card can be a useful financial tool for anyone who has their finances in reasonable order (supported by an income) and is looking for a fast, easy, 21st century way to pay for everyday items. You can do this without paying a fee, if you choose the right card.

But you could also be earning valuable rewards or airline points, and scoring additional perks and benefits, without changing or increasing your spending. The value of those points and benefits may cover the card’s annual fee several times over.

When should you use a credit card?

Use your credit card everywhere it is accepted without a merchant fee (a small surcharge, payable by the card user, levied on card transactions by some businesses) or where the value of the points you could earn exceeds the cost of the merchant fee. Pay with a card in supermarkets, petrol stations, hardware stores, department stores, and restaurants. Bring out your card to pay for entertainment, travel, online purchases, phone bills, electricity, health insurance, gym membership, takeaway coffee, lunch and transport fares – the list is endless.

It’s fast and convenient, especially if you pay with your phone. There’s no need to carry cash, and if you have a rewards card, paying with cash will mean you miss out on points.

How to apply for a credit card

Once you’ve done your research at Credit Card Compare, and found a card you want with the extra features that suit you, make sure that you can meet the eligibility criteria.

Then it would be a good idea to check your credit score, so that you can get an idea of what the bank know about you, and fix any problems with your credit history before you submit your application.

Next, assemble all the information that you are going to need to provide to the card issuer. You can check out what’s involved by reading our ultimate guide on how to apply for a credit card.  

Finally, click on the green ‘Application’ button on the far right of your chosen card’s image on our website, and you’re on your way to becoming the proud owner of a credit card.