What Is a Credit Card and How They Work

By Verified by Andrew Boyd   |   Updated 11 Sep 2024

A credit card lets you borrow money to make purchases. You get a set credit limit and can spend up to that amount before paying it back. It's like a short-term loan you can use again and again.

When you use a credit card, you don't spend your own cash straight away. Instead, the bank pays the seller, and you pay the bank back later.

Key takeaways

Key takeaways

  • Credit cards let you borrow money to make purchases up to a set limit.
  • You can pay your bill in full or in part each month, with interest on unpaid amounts.
  • Cards offer perks like rewards but can have high fees, so choose wisely.

The basics of a credit card

Credit cards give you a set amount of money to spend, which is called your credit limit. You can use the card to buy things up to this limit. You're effectively borrowing money from the bank when you use the card.

You get a bill each month. You can pay it all off or any amount above the minimum payment shown on your monthly statement. If you don't pay it all, you'll owe interest. Interest is extra money you pay to borrow.

Credit cards aren't free money. You need to pay back what you spend. But they can help in tight spots or for big buys where you might want extra protection.

Different types of credit cards

Different types of credit cards

There are many credit card types to suit different needs:

Rewards cards: Earn points on spending.

Low rate cards: Have lower interest rates.

Balance transfer cards: Move debt to save on interest.

No annual fee cards: Free to keep each year.

Student cards: For young people starting out.

Business cards: For company expenses.

Some credit cards offer up to 55 days interest free on purchases. You can avoid interest if you pay in full by the due date.

Choose a card that fits your spending habits and financial goals.

Credit card issuers in Australia

Many banks and financial firms in Australia offer credit cards. Big banks like CommBank, ANZ, NAB, and Westpac are common choices, but smaller banks and credit unions also offer options.

Credit card applications are checked based on your financial situation and credit history. If approved, you get a physical card and can add it to your phone for digital 'tap' payments.

When picking a provider, compare the following:

Compare different providers to find the best deal for your needs.

Basics of how credit cards work

Credit cards are a popular way to borrow money and make purchases. They offer flexibility and convenience, but it's important to understand how they work so you can use them wisely.

Application and approval

You need to apply to a bank or card issuer to get a credit card. The process usually involves:

  1. Filling out an application form.
  2. Providing personal and financial details.
  3. Agreeing to a credit check.

The lender reviews your application and credit history to decide if you're eligible. They look at factors like:

  • Your income.
  • Employment status.
  • Credit score.
  • Existing debts.

If approved, you'll receive your card in the mail with instructions on how to activate it.

Credit limit and repayments

Your credit card has a set credit limit, which is the maximum amount you can spend on the card. The limit is based on your financial situation and credit history – the better your credit rating, the more likely you will be approved.

When you use your card, you borrow money up to this limit. Each month, you'll get a statement showing:

  • Your purchases.
  • The total amount you owe.
  • The minimum repayment due.

You can pay the full balance, the minimum amount, or any sum in between. Paying the full balance each month helps you avoid interest charges.

Interest rates and fees

Credit cards often have high interest rates. If you don't pay your full balance, you'll be charged interest on the remaining amount. Some cards offer interest-free periods on purchases, usually up to 55 days.

Common fees include:

  • Annual fee.
  • Late payment fee.
  • Cash advance fee.
  • Foreign transaction fee.

It's important to read the fine print and understand all the costs before choosing a card.

Credit card fees explained

Credit card fees explained

Credit card companies charge various fees to cover their costs and make a profit.

Rewards and benefits

Many credit cards offer rewards programs. These can include:

Some cards also provide extra benefits like:

While these perks can be valuable, they often come with higher annual fees. It's worth comparing the costs against the benefits to see if they suit your needs.

Security and fraud protection

Credit cards have several security features to protect you from fraud:

  • Chip and PIN technology.
  • Contactless payment limits.
  • Real-time fraud monitoring.

If you spot any suspicious transactions, report them to your bank right away. Most banks offer zero liability protection, meaning you won't be responsible for unauthorised charges.

To keep your card safe:

  • Never share your PIN.
  • Keep your card in sight when making payments.
  • Use secure websites for online shopping.
  • Check your statements regularly.