What is a credit card and how does it work?

What is a credit card?

Having a credit card provides you with access to a line of credit, a bit like having a short-term loan in your pocket, but it requires responsible use and timely repayments. Whilst it gives you buying power, it’s always best to make sure you stay on top of you repayments to avoid paying interest over a longer period and potentially getting yourself into financial difficulty.

Here we’ll discuss the basics, while also touching on some of the more important characteristics of credit cards, such as credit limits, interest free periods, interest rates, repayments, balance transfers and more. Let’s get into it!

Choosing the right credit card for you

The type of credit card you choose should really depend on the following. Do you plan on paying the Closing Balance (or if applicable, your ‘Adjusted Closing Balance’)Tooltip in full every month? Or are you more likely to spread your payments out over a longer period of time?

The reason being is some cards earn reward or frequent flyer points on purchases that can be redeemed for benefits such as air travel, shopping, cashback, gift cards and more. These same card types may also offer complimentary insurances, such as travel insurance.

However, these ‘rewards’ cards typically also have a higher interest rate on purchases. Therefore, if you plan on taking out a ‘rewards’ credit card, you’ll want to check whether or not you can pay off the Closing Balance in full every month to minimise or avoid paying interest on your purchases.

The information on your statement

While you can elect to have a paper copy of your credit card statement sent to your address, most customers prefer to view their statements online via the ANZ App or Internet Banking, where they are stored for up to seven years.

Credit card statements are typically issued monthly and contain the following information:

• Details of the transactions you made for that statement period
• Interest and other charges
• Your credit balance (in other words how much credit you have left)
• Payments made and payments due

On your statement you’ll notice three phrases you should familiarise yourself with – Closing Balance,Tooltip Minimum Monthly PaymentTooltip and Due Date.Tooltip We’ll now explain how each works.

What repayments do I need to make and when?

Interest on your card purchases is charged if the Closing Balance is not paid in full by the Due Date on your statement each month.

To minimise or avoid paying interest on your purchases, try to pay the Closing Balance (or if applicable, your ‘Adjusted Closing Balance’)Tooltip in full by the Due Date every month.

If you’re unable to pay the Closing Balance in full, you should aim to pay as much as you can to minimise the amount of interest charged to your account. At the very least, make sure you pay the Minimum Monthly Payment, which is the least amount you must pay to keep your account operational.

If you don’t pay the Minimum Monthly Payment by the Due Date, your bank may charge you a late payment fee. If non-payment continues, you could end up in default, where the bank will most likely close your credit card and refer you to collection agencies – not to mention the impact it will have on your credit score.

For some helpful payment tips, check out our article on minimum credit card repayments.

How does the interest-free period work?

At ANZ, the interest-free period on purchases for all new non-business credit cards varies.^disclaimer Some cards come with up to 44 days’ interest free, while others come with up to 55 days’ interest free.^disclaimer

Remember, it’s “up to” 44 or 55 days, not 44 or 55 days from each purchase. Given interest-free periods run from the beginning of a statement cycle until the payment Due Date, the number of interest-free days will depend on when you make the purchase within your statement cycle (and the type of purchase).^disclaimer

By sticking to this one golden rule – that is, paying off your credit card in full by the Due Date each month – you should avoid paying any interest on your credit card purchases. Check out our article on how to avoid paying credit card interest.

How and when is interest charged?

Card providers, such as ANZ, charge interest on credit card purchases and cash transactions for the privilege of having a line of credit whenever you need it.

However, as mentioned above, interest on your credit card purchases is only charged if the Closing Balance is not paid in full by the Due Date on your statement each month.

What’s more, all new non-business ANZ credit cards come with up to 44- or 55-days’ interest free, giving you time repay your Closing Balance (or if applicable, your ‘Adjusted Closing Balance’) in full by the Due Date every month before interest is charged.

The interest rate on card purchases (if you don’t pay your Closing Balance in full by the Due Date) varies between cards and is generally much higher for cards that offer reward or frequent flyer points, as opposed to basic, low-rate cards.

How do credit limits work?

The amount of credit you’re eligible for (also known as your credit limit) is calculated based on the financial and other information you provide to your bank when you apply for a credit card.

The bank will undertake an assessment to determine a credit limit for your credit card. You can always ask for the credit limit to be reduced. Check out our article on how to find a credit limit that’s right for you.

Credit card fees and charges

Fees and charges vary depending on the type of card, but here are some of the more common fees and charges you can expect with most credit cards.^disclaimer

• Account maintenance fees – examples include annual fees and rewards program fees
• Penalties – examples include late payment fees or overlimit fees
• Certain transactions – examples include cash advances

Our compare cards tool gives you side-by-side comparisons so that you can weigh up the fees and charges of each card.

What is a credit card balance transfer?

A Balance Transfer is when you move the balance of one or more credit cards onto a single credit card.

This is typically done to take advantage of a low or promotional interest rate offered by a credit card provider, thereby saving you money on interest and giving you a chance to get on top of your credit card debt.

But what you need to remember is that the promotional interest rate (often 0% p.a.) is for a limited time only.

Your goal should be to pay off the transferred debt before the promotional period ends. Why is that? Because once it ends, your credit card will revert to the standard balance transfer interest rate, which will always be higher.^disclaimer

For more information, check out our article on how to use a balance transfer to pay off your credit card debt.

Credit card tips and tricks

If you do decide to apply for a credit card with us, here are some gentile reminders.

Always read your credit card statement and make sure you understand your obligations as a credit card holder. If you believe a transaction has been made in error, you can always dispute a transaction.

Statement information varies from bank-to-bank. However, you should always check the amount you owe (your Closing Balance, or if applicable, your ‘Adjusted Closing Balance’) and when it has to be paid.

And lastly, you should always aim to pay off as much of the Closing Balance as you can by the Due Date on your statement to minimise the amount of interest charged to your credit card account.