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.

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Credit cards are a huge part of Australian life. As of January 2022 there were 13,152,514 credit cards in Australia, with an average of 20 purchases per card per month.

Whether you're thinking of getting a credit card, or you already have one, it is important you understand how they work so that you can avoid paying extra and falling into debt.

What is a credit card?

Unlike a debit card which uses your own money to pay for goods and services, a credit card allows you to use money you have borrowed.

You can use your card to buy what you want now (up to a certain limit) and then pay it off over time.

As you are borrowing the bank's money when you use a credit card, if you don't pay it back on time you are charged interest.

How does a credit card work?

A credit card works as an unsecured revolving line of credit. "Unsecured" means there is no asset as collateral (such as a car or home); and "revolving" because you can use the card on an ongoing basis (unlike a personal loan that you use and pay off over a set term).

You can use the card for your spending, then get a monthly statement that tells you the total amount you owe for that billing period. You can either pay off 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 8.99% p.a. to 21.99% p.a., while for cash advances it is often around 18.99% p.a. to 21.99% p.a.

Example

Let's say you have a $1,000 outstanding balance on your credit card, which has an annual interest rate of 19% (the average standard credit card rate in Australia, as of August 2021).

Pay off $1,000: You will no longer have an outstanding balance and will not have to pay any more interest.

Pay the minimum: Let's say that's a fee of $25. It will take you 5 1/2 years to repay. This will cost you almost $600 in interest. And that's assuming you don't continue to add on any more debt to your credit card.

Pay extra: If you increase your repayments and pay back $250 each month, it will take you just over 4 months and will only cost you $40 in interest.

What are the features of a credit card?

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 a 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.

Woman with credit card

What are the costs of a credit card?

Repayments. Although you're required to make the minimum repayment when your statement is issued, you're free to repay as much as you like and as often as you like beyond that. The minimum repayment is usually only 2% or 3% of your outstanding balance, so it's best to pay your account in full (or as much as you can) each statement period to reduce your interest costs. 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. Interest is the price you pay to borrow money. Credit card interest rates are much higher than other types of finance because credit cards are an unsecured product. This means financial institutions cannot take your assets if you default on your repayments. You can avoid interest charges if you get a no interest monthly fee 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.

What are pending and pre-authorised transactions?

A pending transaction is any transaction that is still being processed. For example, you could buy something right now and see it listed on your account as "pending". Then, once the merchant and payment processors have finalised the payment, it will show up as a transaction.

A pre-authorisation is a temporary transaction where a set amount of funds from your credit card or debit card is put on hold. This is either as a form of security (as with hotels) or for companies to confirm your card is valid and can be charged.

As a pre-authorisation is not technically a charge, you will only see it in your "pending" transactions. In most cases, the funds from a pre-authorisation will be released within 1-14 days. However, an authorisation hold can technically last up to 30 days if it is not cancelled or completed before that time.

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.

Dos and don'ts of your first (or any) credit card

Here are some good credit card habits to get into and some mistakes to avoid:

Do

  • Make regular repayments. You need to make at least the minimum repayment every month to avoid late payment fees and maintain a good credit history. If you can, pay off the full balance owing to avoid paying interest.
  • Stay within your budget. Having a credit card means you can temporarily spend more money than you actually have. Treat your credit card as if you were spending your own money, and if you need to spend more, pay it off as soon as possible.
  • Educate yourself. It's important to understand how credit cards work and how to avoid paying more in fees and interest.

Don't

  • Make cash advances. When you use your credit card to get money from an ATM, gamble or to pay certain bills, you'll be charged a fee of a couple of dollars as well as the cash advance interest rate. Interest-free days do not apply when you use your credit card for a cash advance.
  • Share your credit card information. Unless you're logging directly into your online account or making a purchase from a trusted source, do not enter your credit card information or log-in details into any email, text message or third-party website.
  • Apply for a credit card you can't really afford. While rewards credit cards can be great, these products generally charge higher annual fees and interest rates.

Compare low interest rate, no annual fee and student credit card options

Name Product Purchase rate p.a. Interest-free period Balance transfer rate p.a. Annual fee
Westpac Low Rate Card - Cashback Offer
13.74%
Up to 55 days on purchases
6.99% for 12 months
$59
A no-frills card offering up to $400 cashback: $100 each month you make at least $1,000 of eligible purchases for the first 4 months.
Citi Clear Card - Balance Transfer Offer
14.99%
Up to 55 days on purchases
0% for 36 months
$99
Offers 0% p.a. on balance transfers for 36 months with no balance transfer fee. Plus, complimentary insurance covers.
Bendigo Bank Low Rate Credit Card
0% for 20 months, reverts to 11.99%
Up to 55 days on purchases
0% for 20 months with 2% balance transfer fee
$45
Save money on interest for up to 20 months with 0% p.a. on purchases and balance transfers (11.99% p.a. after). Plus, a $45 annual fee.
Coles No Annual Fee Mastercard
19.99%
Up to 55 days on purchases
0% for 12 months
$0
Get 20,000 bonus Flybuys points when you spend $3,000 on eligible purchases in the first 90 days. Plus, an ongoing $0 annual fee.
St.George Vertigo Card
13.99%
Up to 55 days on purchases
0% for 32 months
$0 for the first year ($55 thereafter)
Get a 0% interest rate on balance transfers for 32 months (with no balance transfer fee) and a $0 annual fee for the first year.
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Compare up to 4 providers

1 - 5 of 18
Name Product Annual fee Purchase rate p.a. Balance transfer rate p.a.
Kogan Money Black Card - Exclusive Offer
$0
20.99%
0% for 30 months
Save with a $0 annual fee and a 0% introductory rate on balance transfers. Plus, earn $30 Kogan.com Credit and uncapped rewards points.
Coles No Annual Fee Mastercard
$0
19.99%
0% for 12 months
Get 20,000 bonus Flybuys points when you spend $3,000 on eligible purchases in the first 90 days. Plus, an ongoing $0 annual fee.
Virgin Money No Annual Fee Credit Card
$0
0% for 12 months, reverts to 18.99%
0% for 12 months
Save with a $0 annual fee and 0% p.a. on balance transfers and purchases for 12 months.
Citi Rewards Card - Velocity Points Offer
$0 for the first year ($149 thereafter)
21.49%
0% for 15 months
Earn 60,000 bonus Velocity Points when you spend $3,000 in the first 90 days. Plus, $0 first-year annual fee.
ANZ Frequent Flyer Platinum
$0 for the first year ($295 thereafter)
20.24%
21.24%
Now offering Cashrewards Max. Receive 70,000 bonus Qantas Points when you spend $2,500 on eligible purchases within 3 months. Plus, a $0 first-year annual fee.
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Compare up to 4 providers

Name Product Purchase rate p.a. Interest-free period Balance transfer rate p.a. Annual fee
St.George Vertigo Card
13.99%
Up to 55 days on purchases
0% for 32 months
$0 for the first year ($55 thereafter)
Get a 0% interest rate on balance transfers for 32 months (with no balance transfer fee) and a $0 annual fee for the first year.
Bendigo Bank Low Rate Credit Card
0% for 20 months, reverts to 11.99%
Up to 55 days on purchases
0% for 20 months with 2% balance transfer fee
$45
Save money on interest for up to 20 months with 0% p.a. on purchases and balance transfers (11.99% p.a. after). Plus, a $45 annual fee.
Westpac Low Rate Card - Cashback Offer
13.74%
Up to 55 days on purchases
6.99% for 12 months
$59
A no-frills card offering up to $400 cashback: $100 each month you make at least $1,000 of eligible purchases for the first 4 months.
Citi Clear Card - Balance Transfer Offer
14.99%
Up to 55 days on purchases
0% for 36 months
$99
Offers 0% p.a. on balance transfers for 36 months with no balance transfer fee. Plus, complimentary insurance covers.
Coles No Annual Fee Mastercard
19.99%
Up to 55 days on purchases
0% for 12 months
$0
Get 20,000 bonus Flybuys points when you spend $3,000 on eligible purchases in the first 90 days. Plus, an ongoing $0 annual fee.
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Compare up to 4 providers

How to apply for a credit card

Once you've found a credit card you want, applying is simple. Usually, you can fill in a secure application form online in around 10-20 minutes if you have all the key details handy. This usually includes basic identification details, your living situation, employment and other financial details including whether you have savings or other assets, what loans or cards you have and an estimate of your regular expenses.

Before you get started, you should make sure you're eligible to apply. The requirements vary between cards but we've listed some common eligibility criteria below:

Eligibility criteria

  • 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 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 do not have any credit history, you won't be penalised but you may only be eligible for a low credit limit until you build up more good 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.

If you're ready to apply for your first credit card, check out our step-by-step guide.

If you still have questions about how credit cards work, reach out to us using the form at the bottom of the page and a member of the Finder team will be in touch.

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24 Responses

  1. 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 Customer Care
      RenchAugust 13, 2017Staff

      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

  2. 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 Customer Care
      RenchJuly 24, 2017Staff

      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

  3. 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 Customer Care
      YsaSeptember 16, 2016Staff

      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

  4. 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 Customer Care
      MayJuly 7, 2016Staff

      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

  5. 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 Customer Care
      JonathanApril 14, 2015Staff

      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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