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How do credit cards work?

A beginner's guide that explains how credit cards work, what they cost and how to choose the right one for you.

lady at computer smiling

Credit cards are a huge part of life in Australia, with over 13 million credit cards according to Reserve Bank of Australia (RBA) data. And Australians make an average of 23 credit card purchases each month.

If you're thinking of getting your first credit card, or you have questions about one you already have, it's important you understand how they work so that you can avoid paying extra and falling into debt.

What is a credit card?

A credit card is a payment card that allows you to spend with borrowed money. It is similar to a debit card in that you can make purchases in-store and online, but any money you spend has to be paid back.

When you use a credit card, banks and credit card providers give you a pre-set credit limit that determines how much you can spend. You need to make regular payments to continue spending and can be charged interest as part of your repayments unless you pay off your balance in full each month.

Credit cards all differ in their features, rates and fees. Some cards may offer benefits such as rewards points or travel perks and others may offer promotional interest rates to help you pay down credit card debt.

How does a credit card work?

A credit card is an unsecured revolving line of credit: it's "unsecured" because no asset is required for you to be approved for your credit limit, and it's "revolving" because you can use the card on an ongoing basis.

When you're approved and start spending with your credit card, you will get a monthly statement that tells you the total amount you owe for that billing period. You can either repay the entire amount or a portion of it, with a minimum required payment that's usually around 2-3% of what you owe.

Your credit card will have a credit limit, which is the maximum amount you can spend. This is assigned by the credit card provider based on your perceived ability to make repayments.

How does credit card interest work?

When you pay with a credit card, your spending will attract interest charges unless it is eligible for an interest-free period (or you have a no interest monthly fee card).

Credit card interest is typically based on your account's daily outstanding balance (what you owe) and then calculated as a monthly average.

This means you could save on interest charges by reducing your outstanding balance through making more than 1 repayment per month. You can check out Finder's credit card repayment calculator to learn more about this.

When interest does apply, there could be different rates depending on the type of transaction. For example, the interest rate for purchases typically ranges from 8% p.a. (per annum) to 27% p.a., while for cash advances it is often around 19% p.a. to 29% p.a.

Example: How to repay $1,500 credit card debt

Let's say you have a $1,500 outstanding balance on your credit card, which has an average interest rate of 19.94%.

  • Pay off the entire balance: If you pay off your entire $1,500 balance, you will have no outstanding debt and not get charged interest.
  • Make the minimum repayments: If you make the minimum payments on your card (paying $30 in the first month) it would take you 19 years to repay and you would be charged $3,612 in interest. And that's assuming you don't continue to spend with your card during that time.
  • Increase your regular repayments. If you increase your monthly repayment to $100, you'd have your entire debt repaid in 1.5 years and be charged $207 in interest. Increase your repayments even more to $150 a month and you repay your debt in 11 months and only pay $124 in interest.

What types of credit cards are suitable for beginners?

woman with credit card pointing at the laptop screen on her husband's lap

If you're new to credit cards and want to get used to having one, it's worth considering a low-cost or no-frills credit card before upgrading to one with bells and whistles (for example, rewards and platinum credit cards which often charge higher rates of interest and a higher annual fee).

Some options you might want to look at include:

Low interest credit cards

Low interest rate credit cards make it cheaper to pay off a debt over time. These credit cards can also offer a low or 0% interest rate on purchases for a promotional period. Low interest credit cards are suited to beginners still finding their feet making repayments.

No annual fee credit cards

This type of credit card costs nothing to own upfront. However, the rates of interest can be higher than low rate credit cards. A no annual fee credit card can sit in your wallet, never come out and it won't cost you a thing. These types of credit cards are suited to beginners who are looking to build their credit history but don't want to go all-out on a credit card with loads of features.

No interest flat fee credit cards

First launched in Australia in 2020, these cards don't ever charge interest on your balance. Instead, there is a monthly fee of around $10-$22 when you use the card (as well as minimum repayments). This can make it simpler to work out how much you're charged each month, but it's worth using a credit card interest calculator to compare the cost of a no interest monthly fee credit card with other cards that charge interest.

Student credit cards

If you're studying at university or TAFE and want to get a credit card, there are some student credit card options that offer lower costs than other cards.

What about rewards credit cards?

If the reason you want a credit card is to earn rewards as you spend, a key factor is making sure you get more value from rewards than what you spend on the card. This could mean choosing a rewards card with a low or $0 annual fee, making sure you pay off the entire balance each month (so you get interest-free days for purchases), choosing rewards based on their dollar value, or a mix of tactics. You can check out Finder's rewards credit cards guide to learn more about them and compare different options.

Not sure about the differences between a credit and debit card?

You're not alone.14% of people surveyed incorrectly thought credit payments were payments withdrawn directly from your bank account, according to our consumer sentiment tracker. Gen Z were the least informed. 17% of those surveyed weren't sure of the differences.

What features come with credit cards?

Credit limit. The maximum amount of money you can borrow on your credit card. This will be determined by the bank based on your income and credit history. Watch out for minimum credit limits too.

Interest-free days. Most credit cards will offer up to 44 or 55 days interest-free. The interest-free period begins on the first day of your statement period and runs through to the due date for payment at the end of that statement period. Interest-free days usually only apply if you've paid your entire balance in full.

Balance transfers. You can transfer an existing credit card balance to a credit card with a different provider and get an introductory low or 0% interest rate on the balance transfer. This will give you time to pay down your debt while paying a low or no interest rate on the balance. If you still have debt from the balance transfer at the end of the introductory period, a higher rate of interest will apply.

Cash advances. Using your credit card to withdraw cash from an ATM, make gambling purchases, buy foreign currency or pay some bills are considered as cash advance transactions. There can be additional fees and higher interest rates and they are not eligible for any interest free periods.

Rewards programs. A rewards credit card gives you a way to get rewards when you pay by card. Rewards include frequent flyer points, gift cards and cashback.

Contactless and mobile payments. You can tap to pay with your credit card without needing to enter a PIN for purchases under $100. A lot of cards also offer contactless mobile payments when you add them to Apple Pay, Google Pay, Samsung Pay and other mobile wallets.

Insurance covers. Lots of credit cards offer some form of complimentary insurance. This can range from purchase protection insurance and extended warranty cover to overseas medical travel insurance and transit accident insurance.

Extra features. Some credit cards come with extras such as airport lounge access, concierge services, invitations to exclusive events, discounts with partnered retailers and much more.

What costs are there?

Repayments. Each statement period you are required to make the minimum repayment (usually 2-3% of your balance). However, you can also repay your account in full to avoid paying interest. You will pay a late payment fee if you don't make the minimum repayment by the statement due date.

Annual fee. Some credit card issuers charge an annual fee which can range from $0 to $500 or more depending on the type of credit card. The credit card annual fee is deducted from your available credit limit and accrues interest at the purchase rate if it isn't paid in the first statement period.

Interest rates. Credit card interest rates typically range from 0-25%p.a. and apply to purchases, cash advances and balance transfers. You can avoid interest charges if you get a no interest credit card or take advantage of interest-free days. You could also save on interest with a card that offers 0% p.a. for an introductory period.

Other fees. Other fees you may run into include late payment fees, over-limit fees (a fee for spending past your credit limit), rewards program membership fees and cash advance fees.

Pros and cons of credit cards

Pros

  • You can avoid interest. You can avoid paying interest if you pay your balance in full each statement period. Most credit cards also offer up to 55 interest-free days that you can make use of.
  • Emergency expenses. Credit cards may give you access to large sums of money on demand which can be useful if unexpected expenses come up that you don't have in your bank account, such as car repairs or broken appliances. However, keep in mind you will be charged interest while repaying whatever you spend.
  • Travel perks. Many credit cards come with travel perks, such as frequent flyer and reward points, airport lounge pass access, complimentary travel insurance and even free flights or travel credits. However, remember to check whether the interest rates and fees charged outweigh the perks.
  • Secure shopping. Credit cards offer a secure way to shop online and in-store. Some offer purchase protection insurance as part of the card benefits and also extended warranty for your purchases.

Cons

  • Interest costs while carrying debt. Credit cards are an ongoing line of credit and do not require you to repay your debt in full, as long as you make minimum repayments. This can see you pay large amounts of interest while you carry debt on your card.
  • High costs for certain transactions. While you can use credit cards for most types of transactions, keep in mind that higher costs apply to some. For example, a cash advance interest rate will apply if you withdraw cash from your credit card and this can be as high as 25% p.a.
  • Potential negative credit score impacts. Getting a credit card does not impact your credit score negatively, but applying for multiple cards in a short space of time or defaulting on your repayments can.

Finder survey: Which of these credit card features would Australians of different ages like to understand better?

ResponseGen ZGen YGen XBaby Boomers
Rewards programs47.19%47.28%40.13%20.74%
Interest-free days43.82%29.89%27.96%11.08%
Balance transfers33.71%27.17%19.41%10.23%
Cash advance32.58%26.09%15.46%6.25%
Purchase rate23.6%23.91%17.76%6.82%
Statement period22.47%16.85%10.86%7.67%
None of the above19.1%24.73%39.8%65.06%
Minimum payment17.98%18.75%14.14%4.83%
Other1.12%1.14%
Source: Finder survey by Pure Profile of 1113 Australians, December 2023

How to apply for a credit card

Applying for a credit card is quite simple and can be done online. The first step is making sure you're eligible.

What eligibility criteria are there?

  • Australian residency status. Often you must be an Australian citizen or permanent resident. Some financial institutions will offer credit cards to temporary residents when they meet the visa requirements. You can learn more about credit cards for temporary residents in this guide.
  • Income. Some credit cards list a minimum income requirement, such as $15,000 or $60,000 per year. Other cards require you to be employed, and some say you need to earn a regular income. There are also cards that don't list any income requirements, but even then you will need to have enough money to be able to make repayments.
  • Age. You must be over the age of 18 to apply for any credit card in Australia.
  • Credit history. If you have a good or excellent credit history, you'll be eligible to apply for most credit cards. But if you have defaults, late payments, bankruptcy or other negative listings on your credit report, you usually won't be able to get a credit card. If you have limited credit history, you won't be penalised but may only be eligible for a low credit limit until you build up your credit history.

You can find these requirements on the card review page or information page, as well as when you click to apply (before you start the actual application). Once you've checked that you're eligible to apply, you can click through to start the application.

What documents do you need to apply?

  • Personal details such as your name, date of birth and address
  • A valid form of ID, such as your driver's licence
  • Employment and income details including recent payslips
  • Other financial details such as information regarding assets, debts and liabilities

Frequently asked questions about credit cards

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24 Responses

    Default Gravatar
    EkeneAugust 13, 2017

    I am a new immigrant to Australian and do not have any credit history. I am considering building up a good one because I might need it for a car loan and/or mortgage sometime in the future.
    Your article was helpful, but I do have some questions:
    Does the credit history system work like that of the US, and what is the credit score range?
    What would be ideal cards for a beginner that has no annual fees, with good rewards? The interest rate may not matter because I intend to pay my bill in full every cycle.

    Thanks.
    Ekene.

      AvatarFinder
      RenchAugust 13, 2017Finder

      Hi Ekene,

      Thanks for reaching out to us.

      With regards to your query about the credit history, yes you need to have it for you to be able to apply for a credit card for your future use.

      A credit score is a numerical representation of your credit history. Please feel free to learn more about how to improve your credit score and increase your chance of getting approved for any future credit applications you may make.

      If this interests you, please consider requesting your credit report for free.

      Simply add your phone number to get our Finder app and start requesting your credit score.

      Alternatively, you can click on the “Continue on web” if you wish not to get your score through the app.
      A pop-up window would appear. Click on the “Log in” tab if you already have a Finder account. Click on the “Register” tab if you wish to create a new account.

      Once you’re in, you can then request your credit score.Hope this helps.

      Best regards,
      Rench

    Default Gravatar
    EmilyJuly 23, 2017

    I am looking into applying for a credit card in Australia. I am currently receiving roughly 24k in welfare and am unemployed. I’ve never had a credit card before, nor have I known anyone who had one while I knew them.
    I’d like to ask a couple of questions. First, about the interest. Does the interest accrue at a certain time in the month (or statement period), or does it accrue all the time except for specifically no-interest periods? For example, if I only made small purchases using it and could pay the entire balance back upon receiving the bill, would I have to pay the interest?
    I would only want a small limit, so as to limit my spending and have it as a back-up in case my welfare for some reason doesn’t come in or is reduced temporarily. Are there any fees or penalties for not using it for a certain period of time?
    Thank you :)

      AvatarFinder
      RenchJuly 24, 2017Finder

      Hi Emily,

      Thanks for reaching out to us.

      Most low-income cards offer interest-free days on purchases, though the number of days (such as up to 55 days) would vary from card to card. To take advantage of these interest-free days, you have to pay your account’s closing balance completely every month. Please read more about what interest free period means for credit cards. After that, you can also explore low income credit cards and see which one would best fit your needs.

      I hope this helps.

      Cheers,
      Rench

    Default Gravatar
    JJSeptember 9, 2016

    Alright… Really stupid here, don’t know anything about credit cards. And when I’m applying for them it asks for my card limit. I’m trying to find articles that explain it for a first-time user. Help?

      AvatarFinder
      YsaSeptember 16, 2016Finder

      Hi JJ,

      Thanks for reaching out.

      You may wish to check our guide about credit cards for beginners. This guide will tell you all you need to know about how credit cards work.

      I hope this helps.

      Cheers,
      Ysa

    Default Gravatar
    SamJuly 7, 2016

    Hi I need a credit card to hire a car in Spain what card would you recommend as I would only need to use it 2-3 times a year

      AvatarFinder
      MayJuly 7, 2016Finder

      Hi Sam,

      Thanks for your inquiry.

      Please check our credit card overseas use guide in comparing your options for credit cards that can be used overseas (or in Spain). Though I’m not sure if these cards we have listed will be accepted by your merchant (for car hire). It’s best to contact the car hire provider if they would accept these cards.

      I hope this has helped.

      Cheers,
      May

    Default Gravatar
    JustinApril 11, 2015

    If i bought a $3000 lawn mower what are some examples of what my payments would be

    Random interest rates and min. Payments

      AvatarFinder
      JonathanApril 14, 2015Finder

      Hi Justin,

      Thanks for your inquiry.

      Depending on whether the card has a promotional rate, you would be paying the purchase rate on the balance remaining. You can compare our range of 0% purchase credit cards to see your options. You can select the “Go to Site” button of your preferred credit card to proceed with your application. You can also contact the provider if you have specific questions. A gentle reminder, please ensure to read through the relevant product disclosure statement and terms and conditions to ensure that you got everything covered before you apply.

      Cheers,
      Jonathan

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