Are you about to start using a new credit card? Whether this is your very first time as a credit card holder or you’re a seasoned card pro, this guide should tell you all you need to know about using this form of credit, and will give you some tips about how to stay debt free.
Let’s start with the basics.
What is a Credit Card?
I’m sure you know in theory what a credit card is but it’s worth considering the basics to get clear on exactly what you’re dealing with.
A credit card is merely a rolling loan. It’s money that is available for you to borrow which you then pay back at a later date. The money you borrow is given to you in the form of a card to stop you having to walk around with cash in your pocket.
When you want to use it in a store you simply hand over the credit card to the vendor instead of money and they swipe the card to let the credit card provider how much you’ve spent. That amount is then taken away from your agreed credit limit and you have a month to repay it.
Any balance left unpaid at the end of the month or credit card cycle will then be charged interest. This is where credit card providers make most of their profits.
To further understand how credit cards work let’s have a look at some of the basic components of a standard credit card.
Credit Card Components
Standard interest rate- Most loans charge you interest on the money you borrow and credit cards are no different. A percentage of any unpaid balance at the end of a billing cycle will be added to your total owed. The percentage that’s added is know as your interest rate. The lower the interest rate the less your balance will increase each month it remains unpaid.
Promotional interest rate- One marketing ploy widely used by card providers is the low rate deal for new customers. Knowing that consumers are attracted to low interest rates, lenders set very low rates for a set period of time in order to entice new customers to take on their cards. These low rate offers are particularly attractive to those who already have some form of credit card debt elsewhere. The reason being is that they get the chance to transfer their debt onto the new card and save money by taking advantage of the new card’s low rate.
Cash withdrawal rate- This is the interest rate charged for any cash transactions made using the card such as ATM withdrawals. This rate is generally higher than a credit cards standard rate of interest, and you should really try to avoid cash transactions as much as possible.
Interest free days- This is the period of time you’ll have to pay your balance before any interest is charged. The more interest free days you have the more time you have to pay off your debt without worrying about additional costs. In an ideal world your balance will have always been cleared within your interest free period.
Annual fee- Most card companies charge customers an yearly fee for using their service. The more premium the credit card the higher this fee will be. Standard credit cards with fewer features and extras will tend to carry a much smaller annual fee.
Some lenders offer cards with no annual fee at all for the first year as a way of interesting new customers.
Reward schemes- Some cards will offer incentives to customers that use their card regularly. You can earn special reward points each time you spend money with your card, and these points can be exchanged for various items and gifts from your lenders range of “rewards”.
You will often find cards with “frequent flyer” points aimed at people who use their credit cards to pay for world travel. These customers earn points which can go towards paying for flights, hotels, and other travel related items.
Reward cards tend to be aimed at people with higher salaries and better credit scores. They also carry a much higher annual fee.
When looking for a new credit card all these features and components should be compared and contrasted. By doing this you’ll find a credit card that suits your financial personality and spending style. But do you know what sort of credit card customer you are, and if not how can you find out?
Here are the most common types of credit card customer. Which one sounds most like you?
The “Only in an Emergency” User
This type of credit card user barely let’s their card see the light of day. It’s really only there to be used in a dire emergency, and even then the balance is usually repaid soon rather than later.
The chances are that this type of customer isn’t going to want a card with tons of “bells and whistles” so a very basic card will almost certainly do the job for them. If you’re this sort of card user then aim to go for a standard credit card with a very low, or even $0 annual fee.
A card that’s used so infrequently will gain no benefit at all from using a reward style credit card that relies on you to spend regularly.
The “Regular” User
This is someone that generally uses their card everyday. Regardless of whether you’re putting petrol in your car, or shopping in your fridge you’ll use your card instead of money every time. It doesn’t matter however as you also pay your balance in full each month.
This type of user will probably get some use from a basic reward style card as their regular spending means they should get a nice amount of points for their trouble. If you can find a card with a low annual fee, and a few freebies then even better.
Someone that pays their bill in full each month isn’t going to be too worried about interest rates so maybe try and save money instead by choosing a card with a low annual fee.
The High Flyer
This is someone who earns a very good salary and isn’t afraid to make the odd large purchase on the card. The chances are they fly around the world quite a bit on business, and would benefit greatly from a frequent flyer reward card.
They’ll enjoy the free airport lounge treats and exclusive rewards that come with such a premium card. Annual fees won’t be much of a concern to this sort of consumer who knows you get what you pay for in life.
They enjoy the perks and aren’t afraid to pay for them. They’ll also have an exceptional credit history with no defaults or misdemeanours on file.
The Everyday Borrower
This is potentially the worst type of credit card customer to be. This is someone who generally uses their card when they don’t have money. If they need to make a purchase before pay day they’ll have no problem whipping out the card to help them out.
The trouble is paying the balance in full each month might be a problem. This means interest rates are going to be more important to this user. If you see yourself as this sort of customer then you’ll want to look out for the card with the cheapest possible rate of interest in case you can’t pay your balance in full each month.
Also try to find a card with long interest free periods. This will also give you more time to pay things off.
How to Pay
How you decide to pay your credit card bill each month will determine how expensive your card will be to run. You have three choices when it comes to paying your bill, and each one will set you on a completely different financial path.
Let’s take a look at your options.
Minimum payments- Credit cards make themselves seem very affordable by only charging you a small percentage of your balance each month. This figure is known as your monthly minimum payments.
The average lender will charge you a monthly minimum fee of around 1.5% to 3% per month. This may sound great in principle. If you were to have an unpaid balance of $1000 and only had to pay 3% each month you’d only be paying out $30 a month!
HOWEVER, there is a monstrous catch that comes with paying your balance in this way. Interest will keep being accrued, and once the effect of compounding takes over, a small debt can turn into something much larger and less manageable.
A percentage of your balance- If you want to pay slightly more than the minimum monthly charge you can choose to make an overpayment. This doesn’t have to be the full balance but as much as you can afford.
This isn’t the ideal way to pay your bill, but will get you in less trouble than those who choose to routinely pay only the minimum monthly payment.
Repay the balance in full- This is by far the most valuable way to pay your credit card as it means no interest will ever be charged. Because interest is only added to your monthly unpaid balance, a full repayment means there’s nothing to be charged against.
By paying off your card this way, any purchases you make will never cost you any more than the price you pay in store.
Which card is right for me?
Before you start comparing credit cards you need to figure out which type of credit card personality you fit. Are you someone who plans on using their card everyday for basic purchases, or will you only use your card in an emergency.
Once you know this you should then write out an in-depth budget sheet. This will detail all your month earnings and expenses. You need to subtract your expenses from your earnings to see how much spare money you have left at the end of the month.
This spare money is your surplus cash and could go towards paying a credit card bill. Once you know what this figure is you can make better decisions when you start looking for the right type of card for you.
Things to Consider
Do you already have a credit card debt?
If you do then the first type of cards you should be looking for are the low rate balance transfer types. These will give you a fighting chance of reducing your balance without the burden of interest.
Have you checked your credit file?
As with all credit products lenders will run a credit check on you when you apply. This credit check will determine how much they are prepared to lend you, and in fact whether they will lend to you in the first place.
For this reason you are strongly advised to check your own credit file before you go through the application process to look for any errors. Often companies can make mistakes on your credit file that show you have bills unpaid or defaults against you.
These mistakes don’t happen all that often but when they do they can cost you. Look at your credit file and query anything that doesn’t look right with the relevant company.
Can you afford it?
Because credit cards carry such a risk of debt with them you really need to ask yourself whether you can afford to take one on. If you don’t feel confident in your ability to remain disciplined with it then you may want to avoid a card altogether.
Is there an alternative?
If you’re considering a credit card because you need a loan then there are far better options available to you. A personal loan will generally work out far cheaper and won’t carry such a risk with it.
Have a look around and see whether a credit card is really your right option for you. Most times you’ll find it’s the most expensive way to borrow money.
Although credit cards can be dangerous when used irresponsibly, in the right hands they can be a very useful tool in your financial arsenal.
Choosing a Credit Card
- Comparing Credit Card Deals – There’s more than one way to apply for a credit card – what are the different methods and what pros and cons does each offer?
- Compare Credit Card Types Easily
- Which Banks Provide Credit Cards?
- Revealed: The Cheapest Credit Cards
- When does a Petrol Credit Card Make Sense?
- 0% Credit Cards: The Big Deal
- Personal Loan VS Credit Card
- Reward Credit Cards – Not for Everyone
- Cashback Credit Cards: How do they Work?
- MasterCard or Visa: What’s the Difference?
- Information on 0% APR Cards
- An Unorthodox Way of Finding the Right Card
- How to Compare Credit Card Offers
- Reward Programs vs Low Interest Cards
Credit Rating, Credit Limit and Credit Repair
- 5 Ways to Improve your Credit Rating
- How Does a Balance Transfer Affect your Credit Rating?
- Successfully Disputing Errors on your Credit Report
- Secrets to Fast Credit Repairs
- 7 Tips to Obtaining a Higher Credit Limit
Credit Card Management Tips
This section is designed to help you use your credit card and maximise the rewards you can get from it. There are also traps, myths and disasters that can occur with your credit card and we want to help you avoid them.
- Stoozing: Create Free Money with Credit Cards
- Popular Credit Card Myths
- Making Money with Credit Cards
- Why Consider a Lower Interest Rate Credit Card?
Credit Card Traps and Scams
Balance Transfer Explanations and Tips
- Best Balance Transfer Guide*
- Credit Card Balance Transfer Calculator
- Long Term Balance Transfer Approval Requirements
- Is it Possible to do a 2nd Balance Transfer?
- How to Carry out a Balance Transfer
Debt Consolidation and Repayment
- Credit Card Consolidation
- Tips on Paying Removing your Credit Card Debt
- Debt Consolidation and Australians
- Advice on Cutting Credit Card Debt
Shopping and Holiday Spending
Travel & International Fees
Frequent Flyer Programs and Points
Reward Programs and Cash Back
- 4 Ways Reward Credit Cards Cost More
- Best Credit Card Rewards – Comparing Programs*
- Guide to Reward Points
- Get the Most from Reward Programs
- How to Earn Reward Points Faster: Bonus Partners
Family and Student Tips
Special Types of Credit Cards
Some credit cards are specifically designed for business which can help your business function and manage its credit. Debit cards are also a unique type of credit card that are a little confusing at first although these types of credit cards can be a fantastic way to manage your money. Other special types of credit cards will be added here as they are released.
Credit Cards for Business
Credit Card Features
A credit card has some fundamental features in common of all cards. Learn about these features and understand your credit card for better management of it.
Credit Card Fees
Credit Card Interest Rates
- A Guide to Credit Card Interest
- Low Interest Credit Cards
- Interest Rates: Explained
- What does ’55 Days Interest Free’ Really Mean?
Credit Card Cash Advances
Credit Card Statistics
Personal Finance Tips and Advice
A credit card is just one part of your overall personal finance, we have detailed some other relevant personal finance tips and advice that will help you manage your money. There are times when a personal loan may make more sense than a credit card and it may be important to learn about these products if you already have credit card debt.
Save and Manage Your Money
Personal Loan Information
Credit Card News
The credit card industry is always changing and we endeavor to provide you with the latest news and updates especially interest rate changes, new products, reviews and other items when they occur.
This credit card guide is designed to help you answer your credit card questions. If you have a question that is not answered here do not hesitate to contact us.
If you’re new to the world of credit cards, we recommend you check out our guide to different credit card types first.