How to use a credit card?

1. What exactly is a credit card?

A credit card works much in the same way as a debit card, with a key difference being you don’t need to have money available in your account, as you are using a line of credit. This means you borrow money from the company that issued you the card to pay for any purchases you make with it. Credit can be extended by your local bank, another financial institution, or even a specific store.

Looking at your credit card, you should find your:

• Name
• Card number
• Expiration date
• CVV security code (often printed on the back)

Each of these fields may be required when making credit card purchases online or in person.
When you pay with your credit card, the amount is charged and then at the end of each billing period (usually each month), the card issuer will send you an invoice. You will then normally have a set grace period to pay off the balance before interest begins to accrue. Different credit cards may offer different numbers of interest-free days per billing period.

→Related: Visa vs Mastercard: What’s the Difference?

How to read a credit card statement

You’ll typically be sent a credit card statement every month, which summarises your recent account activity.

Some of the main components of a credit card statement include:

• Total card balance: How much money you currently owe on your credit card.
• Available credit limit: How much more money it’s currently possible for you to borrow on your credit card.
• Recent purchases: Transactions you’ve made on your credit card this billing cycle
• Minimum payment and due date: The smallest amount of money you need to repay on your credit card, and when this payment needs to be made by.

Remember that making only the minimum repayments on your credit card could mean you’ll be charged significant interest in the future.

2. What types of credit cards are there?

There are many different credit cards out there, each designed to suit certain purposes or people.

Each credit card will have a different minimum and maximum credit limit. Your credit limit is simply the maximum amount you can have owing on your credit card at any one time. Credit limits are generally between $1000 and $10,000 but can be higher depending on the card. Your lender will set your specific credit limit based on information provided as part of your application.

Some cards are structured to be used in emergencies only, and may have a lower credit limit, lower interest rate, and a relatively low annual fee compared to other credit cards. Others have higher limits, rates and fees, and are intended for everyday use, such as convenience purchases and regular shopping like groceries and fuel.

Credit cards may also be used for larger purchases in order to pay off an item over an extended period of time, with interest applied. However, you would need to consider whether a credit card is a suitable way to cover larger costs, as the interest you would pay could make it an expensive way to pay for a purchase, compared to using your savings for example.

Selected credit cards offer more ‘perks’, such as rewards points or frequent flyer air miles that accumulate as you use your card for qualifying purchases. You can later redeem these points for discounted flights, accommodation and other purchases, depending on the reward program. Just remember that rewards credit cards also tend to have relatively high rates and fees.

Some credit cards may also offer a low or no-interest introductory period to help attract new customers. While this can help keep your costs down early on, unpaid credit card balances can come back to haunt you when this introductory period comes to an end.

3. How much will a credit card cost in interest and fees?

The main thing to remember when using credit cards is that unless you are very careful about your spending, they come with a cost.

When it comes to your credit card’s unpaid balance, you have two options each month: pay it in full, or make the minimum repayment each month. By paying your credit card balance off in full, you’ll essentially wipe the slate clean, meaning you owe nothing and will have no interest accruing. On the other hand, if you make only the minimum monthly repayments, you will avoid late payment fees, however, you will still accrue interest on the remaining amount owing.

These interest costs can quickly accumulate if you don’t regularly pay off your balance each billing period, or when a low or no-interest introductory rate period ends.

There may also be annual fees. Some credit card providers charge annual fees each year just for the convenience of having the card in your wallet, whether you are using it or not.

Other credit card fees to be aware of include:

• international transaction or exchange fees
• cash advance rates/fees
• late payment fees
• Balance transfer fees
• Returned payment fees

4. What are some of the benefits of using a credit card?

Depending on the credit card you choose, you may also have access to a range of beneficial perks. When used appropriately, these perks can provide a financial benefit to help offset or even exceed the card’s cost.

Rewards points

Signing up for a rewards credit card may let you accumulate rewards points on purchases. Using your card to pay for things you buy every day, and paying off balances before interest can be added, could help maximise the points you earn. Depending on the card you choose, you may be able to exchange your points for gift cards or other items. Some credit card providers also offer special promotions that let you earn extra points for purchases, or a lump sum of bonus points when you first take out the card.

Insurance options

Many credit cards come with built-in insurance policies. Two of the most common types of cover offered are:

• Travel insurance, which can help provide financial protection for things such as your luggage going missing, or your trip being cancelled, and;
• Purchase protection insurance, which can help protect you if your purchase is lost, stolen, damaged, or goes on sale after you have purchased it.

As with any insurance policy, it is important to read the product disclosure statement (PDS) carefully, to work out whether the cover you receive meets your needs. For example, just because your credit card offers you some cover for travel related expenses, it doesn’t necessarily mean you would be covered for all the risks that could crop up on an overseas trip and you might still want to consider a separate travel insurance policy for your trip.

Cashbacks

Some cards will allow you to use your rewards points to get cashbacks – essentially getting money credited back to you on eligible purchases you have made using your credit card. This can help you to offset the cost of purchases if you don’t use rewards points for other purposes.

→ Related: 8 hacks that could help you pack away more frequent flyer points

5. How do you use a credit card responsibly?

Having a credit card can be exciting, but remember that it represents a line of credit, not free money. Here are some tips to consider to help ensure you use your credit card responsibly:

• Before applying, consider whether a credit card is the right choice for you and your current and future financial circumstances.
• Remember that a credit card can affect your credit score. Every time you apply for a credit card, it will show on your credit history, whether you were approved or not. And if you ever fail to meet a repayment, or get into financial distress with your credit card, this may also make a negative impact on your credit score.
• Consider keeping any spending on your credit card in line with your actual budget, so you can pay off your balance easily at the end of each month.
• If you need to use your card for an emergency, consider paying off the balance as quickly as possible to reduce interest accumulation.
• Set a sensible limit; if you feel you might spend too much, you could discuss lowering your credit limit with the card issuer.
• Be careful with cash advances (using your credit card to withdraw cash, such as from an ATM), as they are often subject to a higher rate of interest and aren’t included on no-interest rate grace periods.

6. Do you really need a credit card?

Before you sign up for a credit card, think about whether or not you really need one. If you only want a credit card for convenience, or think you’d struggle to pay off your spending in full each month, you might find that the cost of having a credit card outweighs the benefits. However, if you need a credit card for emergencies, or feel that you could benefit from a credit card rewards program, a credit card could be worth your consideration.

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