Written byA credit card is a form of revolving credit that lets you borrow up to a pre-approved limit for purchases, cash advances or short-term finance.
Key points
- Pay the full statement balance by the due date and purchases are usually interest free for that cycle.
- Carry a balance and interest applies at the card's purchase rate; cash advances usually cost more and accrue from the withdrawal date.
- Compare the purchase rate, annual fee, foreign transaction and balance transfer fees, and the revert rate after any promotional period.
- Payment history, your credit limits and new applications all feed into your credit rating.
How a credit card works
Transactions post during a billing cycle of about 30 days. On the closing date the issuer produces a statement listing the balance and a minimum payment, and you then have a set number of days to pay. Meet the minimum by the due date and you avoid default. Pay the balance in full and, where the card offers interest-free days, purchases carry no interest for that cycle.
Carry part of the balance forward and the card's purchase rate applies to what is left. New purchases may then attract interest from the day they post rather than from the next statement, and paying only the minimum lets compound interest build the balance for years.
Types of credit card
Rewards and cashback cards suit people who pay in full each month and get more from the points or cash back than the annual fee costs. Low rate and low fee cards suit anyone who sometimes carries a balance. Balance transfer cards move an existing balance onto an introductory rate for a set period, which can help with debt consolidation.
Secured cards set the limit against a security deposit and are used to build or rebuild credit. Business cards add expense management and record keeping, though a card provided mainly for business purposes generally sits outside the National Credit Code, so responsible lending and Key Facts Sheet protections do not apply. Prepaid cards are not credit at all, since you load the funds first, and charge cards require the balance to be cleared in full each month.
Costs, protections and what to check
Beyond the purchase rate, watch the annual fee, the cash advance fee and rate, the balance transfer fee, the foreign transaction fee on overseas spending, and late payment charges. Promotional rates expire and revert to the standard rate, and issuers differ in how they allocate your payments across balances. The credit contract and precontractual statement set the terms out.
For a consumer credit card, issuers must meet responsible lending obligations and run affordability checks before granting a limit, and must give you a Key Facts Sheet with the application. Report unauthorised transactions straight away, and put billing disputes through the issuer's process. If repayments become unmanageable, ask about hardship assistance. Unresolved complaints go to AFCA.
Not to be confused with
- Personal loan
- a personal loan is fixed-term credit repaid on a set schedule, not a revolving limit you can redraw
Frequently asked questions
How is credit card interest calculated?
Interest is generally worked out on the balance you carry, applied daily or monthly at the card's purchase rate. Pay the full statement balance by the due date and purchases usually attract none. Cash advances and promotional balances follow different rules, so check the credit contract, the precontractual statement and, for a consumer card, the Key Facts Sheet.
What is the minimum repayment on a credit card?
It is usually a small percentage of the statement balance or a fixed dollar amount, whichever is greater. Meeting it keeps the account in order, but paying only the minimum stretches the debt out for years and adds a great deal of interest.
How do balance transfers work?
You move an existing card balance to a new card at a reduced or zero introductory rate for a set period. Expect a transfer fee, and check the revert rate that applies once the promotion ends and how the issuer allocates your payments across balances.
Do credit cards affect my credit score?
Yes. Your payment history, your credit limit and every new credit application feed into your credit file. Consistent on-time payments help, while missed payments and a run of applications do not.
Can I get a credit card with poor credit?
There are options, including secured cards and cards aimed at people rebuilding their credit history. They generally come with lower limits and stricter terms. Reducing existing debt and spacing out applications before you apply improves your position.
Related terms
Broader term: Credit
Revolving credit
Revolving credit is a form of credit that lets you draw, repay and redraw funds up to a pre-set limit, with minimum monthly repayments.
Read definitionPersonal loan
A personal loan is a fixed term loan for personal expenses, repaid in regular instalments over an agreed period, usually principal and interest.
Read definitionLine of credit
A line of credit is a revolving credit facility with an approved limit that you can draw, repay and redraw, paying interest only on the drawn balance.
Read definitionDebt consolidation loan
A debt consolidation loan is a personal loan used to pay out several existing debts, such as credit cards and payday loans, leaving one repayment.
Read definitionUnsecured loan
An unsecured loan is credit you borrow without pledging collateral, so the lender relies on your income, credit history and capacity to repay.
Read definitionConsumer credit
Consumer credit is a loan, credit card, consumer lease or other credit provided mainly for personal, household or domestic purposes and regulated by the National Credit Code.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.