Cutting through the jargon: Credit Cards
Whether you’re a newbie or a seasoned credit card holder, credit cards can be confusing. We use them every day to pay for everything from groceries to flights, but do you really know your way around the credit card jargon? Let’s have a look at some common terms below.
Now, let’s start right at the beginning! A credit card is a form of payment that gives you access to credit. Each month that you use any of the credit that is available to you, you are required to pay a minimum, partial or full amount owing. When you don’t repay the full amount owing, the remaining balance is carried over to the next month and you may be charged interest.
A charge card is similar to a credit card except you have to repay the entire balance in full each month. You can’t roll over your balance to the next month so you’re not charged interest but if you can’t repay the full amount, you could be charged penalty fees.
Your credit limit is the maximum amount you have been approved to spend on your card. It’s usually decided when you make your application but you can always change it via your internet banking portal or by calling up your credit provider.
INTEREST FREE DAYS
The number of interest free days is the maximum number of days that you will not be charged interest on a purchase you have made. The actual number of interest free days will depend on when you make the purchase during your statement period.
So how does it work?
Let’s say you have a credit card with 55 days interest free and your statement period is 30 days.
On day 1 of your statement period, you decide to buy a selfie stick DVD for $20. You have 30 days until the end of the period and an extra 25 days afterwards to pay off the $20 before interest is charged. That’s a total of 55 days interest-free.
Now, let’s say you buy a DVD player for $200 on day 14 of your statement period. You now have 16 days until the end of the period and an extra 25 days to pay off the $200, giving you a total of 41 days interest-free.
Be careful! Interest-free days only apply if you pay off your balance in full each month.
The purchase rate is the interest rate that can be charged on purchases you make on your credit card. It’s a variable rate and is subject to change.
Some credit cards offer an introductory purchase rate which is usually a much lower interest rate on purchases for a limited period of time. For example, an offer of 0% p.a. for 6 months. Once the initial period has expired, any remaining balance and any future purchases will incur interest at the standard purchase rate.
A cash advance lets you withdraw cold hard cash from your available credit balance. For example, if you stick your credit card into an ATM and withdraw $50, that’s a cash advance. There’s no interest-free period so you’re charged interest from day one at the cash advance rate and you could also be charged a cash advance fee.
If you rack up a balance on your credit card, at the end of the month you are required to make a minimum payment to your credit provider. It’s usually a percentage of the closing balance or a set dollar amount. For example, you may be required to pay the greater of 2% of the closing balance or $20.
Beware! If you consistently only pay the minimum payment each month, it could take you years to pay off your balance and you could end up paying thousands in interest charges. So where possible, try to pay more than the minimum amount.
Want to learn more about credit cards? You might like to read our article: What you need to know about credit cards.