What you need to know about credit cards
What is a credit card?
A credit card is a convenient form of payment, giving you access to a loan. If you are unable to repay the full amount you have spent each payment period, your credit card offers you the flexibility to carry over the balance to the next payment period.
Your credit card provider allows you to effectively borrow money with the expectation that you will repay a minimum, partial, or the full amount owing each month. When you do not repay the entire closing balance, the remaining amount is carried over to the following month and may be subject to an interest charge.
What is a charge card?
Charge cards are very similar to credit cards except you must repay the entire closing balance in full each month. Therefore, you will not be charged any interest on a charge card. As you are not charged any interest, cash advances and balance transfers are typically not permitted.
Some charge cards do not have a pre-set credit limit, so it is important to keep track of your spending so you are certain you can repay the closing balance at the end of the month. If you fail to repay the closing balance, you may be charged penalty fees such as a late payment fee.
What is a credit limit?
The credit limit is the maximum amount you have been approved to spend on your credit card. The credit limit is set by the credit provider and is based on an assessment of the information in your application and your credit file.
When you use your credit card, your available credit will decrease by the amount that you have spent. As you make repayments, this amount of credit becomes available for you to use again. For example, if you have a credit limit of $1000 and you make a $200 purchase, your available credit will decrease to $800. If you make a repayment of $50, your available credit will increase to $850.
From July 2012, your credit provider is not allowed to charge you a fee when you exceed the credit limit on a new credit card account unless you have specifically agreed to be charged for the service.
If you have a closing balance at the end of each month, you are required to make a minimum repayment to your credit card provider. The minimum amount is usually a percentage of the closing balance (generally 2 to 3%) or a set dollar amount as determined by your credit card provider.
Although it is not required, you should aim to repay more than the minimum amount each month to reduce interest charges and to pay off your balance faster.
Your credit card statement includes a minimum repayment warning that displays how long it will take you to repay your balance if you only make the minimum repayment and the total amount of interest you will pay. Depending on the size of your balance and the interest rate, it could take you years to pay off your balance and you may incur excess interest charges that could be avoided if you repaid more than the minimum amount each month.
What are interest free days?
The number of interest free days is the maximum period of time that you will not be charged interest on a purchase.
Most credit cards come with 40 to 55 days interest free. However, there are some that do not have any interest free days.
It is important to consider the number of interest free days when researching potential new credit cards. If you don’t know how many interest free days come with your card, check your credit card contract or speak to your credit card provider.
Interest free days only apply if you repay the full closing balance by the due date. If you carry a balance over to the following month, every purchase you make will attract interest from the day you make the purchase.
For example, you have a credit card with 55 days interest free and your statement period is 30 days. If you make a purchase on day 1 of your statement period, you have 30 days until the end of the period, and an extra 25 days after to pay off this purchase before interest is charged. If you make a purchase on day 14 of the statement period, you have 16 days until the end of the period, and an extra 25 days to make your payment, giving you a total of 41 days interest free.
What is a purchase rate?
A purchase rate is the interest rate charged on purchases made on the credit card. The standard purchase rate is variable and is subject to change.
Introductory purchase rate
An introductory purchase rate is usually much lower than the standard interest rate on purchases and is only valid for a certain period of time.
Once the introductory period has expired, any remaining balance will be subject to the standard interest rate on purchases. An introductory purchase rate reduces the amount of interest charged, making it easier and faster to repay your closing balance.
What is a cash advance?
A cash advance allows you to withdraw cash from your available credit balance.
There is no interest free period on cash advances. Interest is charged from day one at the cash advance rate and is usually much higher than the interest charged on purchases.
Many credit providers also charge a minimum withdrawal fee for cash advances.
What is a balance transfer?
A balance transfer occurs when you move an existing card balance to a new credit card account (usually with a different credit card provider).
As an incentive to switch credit cards, many credit card providers will offer much lower interest rates on balance transfers.
The interest rate charged on a balance transfer will only last for a specific period of time. Once elapsed, the interest rate will revert to either the standard interest rate on purchases or the cash advance rate (the so called revert rate), both of which are generally much higher than the balance transfer rate. Check the terms and conditions and be aware of the revert rate before you transfer a balance.
Also bear in mind that you might not be able to take advantage of interest free days on your balance transfer card (since the card has a balance). Any purchases made while your balance remains unpaid will attract interest from the date of the purchase.
Be sure to check the term and conditions of the balance transfer offer. Some card providers charge a balance transfer fee (which is a small percentage of the total balance transferred), have conditions around the minimum and maximum amount that may be transferred, and have restrictions on eligibility for the offer.
For credit cards with an annual fee, each year on the anniversary of the day you activated your credit card, you will be charged an annual fee. The annual fee covers the cost to your credit provider for providing and maintaining your credit card account.
Late payment fee
If you do not pay the minimum amount due by the date specified on your credit card statement, you will be charged a late payment fee.
Foreign currency transaction fee
Most credit cards charge a foreign currency transaction fee when you make any purchase in a foreign currency. This includes purchases made overseas and purchases made online in an international store.
The fee (generally 2 to 3%) is calculated on the total amount you spend and can vary depending on the type of credit card you use (Visa, MasterCard, American Express, or Diners).
Make sure you are aware of the foreign currency transaction fee before you make a purchase or consider using a credit card with no foreign currency transaction fees.
Credit card key facts sheet
Since July 2012, credit providers must issue you a credit card key facts sheet when you apply for a credit card. If you don’t receive a credit card key facts sheet, ask your credit provider to issue you one.
The credit card key facts sheet will detail common features of the credit card, making it easier to compare different credit cards from various credit providers.
The information contained in the credit card key facts sheet includes:
- The product name
- The minimum credit limit
- The minimum repayments
- The interest rate payable on purchases
- The interest free period
- The interest rate payable on cash advances
- Any promotional interest rates
- The interest rate payable on balance transfers and (if applicable) the number of months for which the rate is applicable
- The annual fee
- The late payment fee