How do credit cards work?

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.

What types of credit cards are suitable for beginners?

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 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 balance transfer 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

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

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

• Is it worth using a credit card in Australia?

  Many Australians choose to get a credit card to use in emergencies, to make big purchases or to collect rewards. However, whether it's worth getting will depend entirely on your own circumstances and what you would want to use the card for.

• What's a good limit for a first credit card?

  This depends on a few factors including your income and what you're planning to use the card for. As it's your first credit card, requesting a credit limit on the lower end of what you're able to get may be a good idea while you get used to making regular repayments and keeping your spending in check. You can always apply to increase the limit later on.

• What happens if I have a credit card but never use it?

  As long as you have no annual or monthly fees on your credit card, you shouldn't need to do anything. If you are being charged regular fees you will still need to make minimum payments to keep your card in good standing.

• 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.

Written by

Amy Bradney-George

Editor

Amy Bradney-George was the senior writer for credit cards at Finder, and editorial lead for Finder Green. She has over 16 years of editorial experience and has been featured in publications including ABC News, Money Magazine and The Sydney Morning Herald. See full bio

Amy's expertise

Amy has written 584 Finder guides across topics including:

• Credit cards
• Frequent flyer
• Credit score
• BNPL
• Money management
• Sustainability

Co-written by

Rebecca Pike

Senior writer

Rebecca Pike is Finder's senior writer for money. She joined Finder after almost four years writing for business publications in the mortgage and finance industry, including three years as editor of Mortgage Professional Australia. She regularly appears as a money expert on programs like Sunrise and Today, as well as across radio and newspapers. She also holds ASIC-recognised certifications in Tier 1 Generic Knowledge and Tier 2 General Advice Deposit Products. See full bio

Rebecca's expertise

Rebecca has written 195 Finder guides across topics including:

• Home loans
• Cost of living
• Budgeting