A quick guide to understanding how credit cards work

Originally published by InfoChoice, part of the iSelect Group.

Credit cards seem easy enough to understand. You apply for one with your chosen lender, and once approved you have the freedom to purchase goods and services as you need them.

But rather than spending the money in your personal transaction account, you’re accessing a line of credit and borrowing money from the bank. That’s why it’s important to understand exactly how credit cards work.

How much will my credit card cost?

There are two major factors that impact how much you’ll pay on your credit card: 

• Interest rates 
• Fees, such as late payment fees or account administration fees 

Each payment you make will accrue interest, which is charged on a monthly basis. Making regular repayments should reduce the amount of interest charged. 

Many cards also come with an introductory interest rate for a set time period usually between three months and two years. Once this time over, your interest rate will revert back to the standard interest rate for your card. 

Using a credit card

1. Find the right credit card for you: The first step is to compare credit cards online to find one that’s suitable for your financial situation.
2. Submit your application: You can apply online by clicking through our comparison tables to your chosen lender’s website. Your lender will then review your application and look at your credit score before approving your application.
3. Wait for your new card: Once approved, it can take up to seven business days for your new card to arrive. Your PIN will also be sent in a separate letter, some lenders will let you change your pin online, so you don’t have to wait.
4. Start spending: You’re now free to use your new card to pay for products or services you need.
5. Make regular repayments: Making regular repayments on your credit card, should avoid or reduce the amount of interest charged and avoid any late payments fees.
6. Avoid the debt trap: Credit cards should be used with caution. 

Features of a credit card

Credit card limit: This is the maximum amount of money you can borrow using your credit card. The limit is set by your lender, but you can often request to reduce or increase your limit. 

Interest rate: This will determine how much interest you pay on each purchase you make using your credit card. 

Minimum monthly repayments: You’ll be required to make regular repayments to pay off your credit card charges. Each month you’ll have to make a minimum monthly payment. If possible, it helps to pay off more than the minimum as this will reduce your debt and minimise the interest you’re required to pay. 

Interest-free period: Many credit cards come with an interest-free period. You usually have between 30 to 60 days to pay off your purchases before you are charged any interest. 

^{Last reviewed 09/03/23}  

Any advice provided in this content is of a general nature and does not take into account your objectives, financial situation or needs. You need to consider the appropriateness of any information or general advice we give you, having regard to your personal situation, before acting on our advice or purchasing any product. iSelect does not compare all products in the market. Not all products are available at all times. 

Originally published by InfoChoice, part of the iSelect Group. This content may not be altered. Licensed to iSelect.