How Do Credit Cards Work?

What is a credit card?

Most Aussies will have at least three cards in their wallets: a debit card, an everyday ATM card, and a credit card. 

Debit and ATM cards link to standard bank accounts and savings accounts. These are usually the main accounts people deposit their wages into and accumulate savings. The credit card, on the other hand, is a line of credit provided by the bank. 

Debit cards use your money to pay for purchases, whereas credit cards use the bank’s — which you’ll repay, usually with interest and fees. 

Paying for items on a credit card will reduce the available credit, which is set by your credit limit. These credit transactions can stay on your account as ‘pending’ for a few days, so it’s crucial to double-check your credit card statement. For example, the bird’s eye view of your account might show -$1,000, but when you look at your transactions list, you have a $250 charge pending that’s not yet reflected in the -$1,000. 

More than one in every two Australians has a credit card. On average, those with credit owe approximately $2,800 per card[1].

Why use a credit card?

Credit and debt shouldn’t control your life. Credit cards can help empower you to achieve your biggest goals in life. These tools offer more freedom, convenience, and control over your finances — if used responsibly. It’s a great way to build your credit score, access reward points, and prove to lenders that you can handle big sums of money. If you pay off what you owe within the month, you can often avoid any interest. 

There’s also better fraud and purchase protection insurance with credit card purchases — take online shopping, for example. According to the Australian Competition and Consumer Commission[2], if you paid by credit card and didn’t receive the product or service, you can contact your bank and ask them to reverse an unauthorised charge. 

Given that recent numbers show Australians are using their credit cards approximately 22 times per month, with an average $110 purchase, protection is more important than ever. 

Credit cards can be one of the most valuable aspects of your financial life when used responsibly. 

When to use a credit card

Before you get a credit card or apply for a new one, considering when you might use it is worthwhile. The three main reasons Australians take out credit cards are emergencies, frequent flyer points, and big-ticket purchases. 

You can’t foresee every major future spend but it can be helpful to think about when you’ll use a credit card — and, just as importantly, when you won’t. You’ll avoid temptations if you have a clear strategy around when and why you’ll use credit. It’s also important to distinguish between your credit limit, your available credit and money that’s actually yours. 

Start on the right foot when using a credit card by doing your research, knowing your numbers, and allocating time every month to review your credit standing. Dedicating one hour every few weeks can save you thousands in the future, as you’ll be able to secure competitive rates on lines of credit. 

Credit cards are an investment in your future, as well as today. Let it empower you, not control you.

How to choose a credit card

Reflecting on how you’ll use a credit card will help you pick the best type of credit card for your needs. There are low interest cards, premium cards, frequent flyer points, 0% interest cards, no annual fee cards, 0% foreign fee cards, balance transfers, rewards programs, store cards, business cards, and student cards. 

Do you want low fees, a low interest rate, or to accrue rewards? 

Here are a few of the popular choices: 

Low interest cards

A great option for consumers new to credit, these cards charge a low, ongoing interest rate and typically have low fees. 

Frequent flyer cards

Earn thousands of frequent flyer and reward points simply by signing up for certain credit cards. Many premium cards come with rewards, travel perks and extras. 

0% interest cards

Balance transfer cards usually come with a 0% interest introductory offer for a period of time, then move to a standard rate. These products can help move your debt over to one card without interest to help you get ahead with repayments. 

Reward program cards

Earn points with Qantas, Velocity and Flybuys upon sign-up, and with every dollar you spend. For example, with Flybuys points, you can shop at Coles, Kmart, Target, Bunnings, and dozens of other household names. Always read the terms and conditions with reward cards.

Store cards

As these are specific to a brand or chain such as Coles, Woolworths, Myer or David Jones, you can only use them to shop in that respective store. As a cardholder, you can access exclusive benefits but be wary of the rates and fine print for interest-free deals.

Credit card costs & charges to consider

Using a credit card responsibly is about more than paying it off in time, every month. Just like it’s important to check your credit score at least once a year, follow the same approach with your credit products. 

Credit card interest rates

You should know your interest rate and how it compares to the industry standard and other products. Knowing your interest rate will help you calculate how much interest you’ll owe — if any. 

Don’t be afraid to call your bank and negotiate a competitive interest rate or to discuss waiving any fees. As a consumer, you have more power than you realise, especially if you’re in good credit standing. 

Other credit card fees

Beyond the monthly repayments, keep in mind these additional costs. 

• The ‘honeymoon’ interest vs. the standard rate. Will the rate match or be greater than the industry standard? Some introductory offers are misleading.  
• The interest rate on every purchase.
• Interest-free window. 
• Monthly and/or annual fees. 
• Rewards program fee. 
• Late fees. 
• Cash advance fees.
• Charges for exceeding your credit limit.
• International, or foreign exchange, fees. 

As you research the best credit card, weigh up the rewards, sign-up bonuses and convenience with the interest payments, ongoing fees, and stress. As with everything financial, whether credit helps or hinders you, it comes down to you. Always reach out for help and lean on your financial providers to support you. 

How to apply for a credit card

You can apply for a credit card online at your preferred bank. The big four banks provide in-depth resources to help you compare the different credit cards. For example, to apply for a Commonwealth Bank credit card, individuals must be over the age of 18, legally have the right to work in Australia, and must not be bankrupt. 

 The application process will be slightly different with each bank, but the requirement is the same — they want to see what you earn, own, and owe. Payslips and any loan statements may be required. The more prepared you are with your documents, the better.