A guide to how credit cards work

Credit cards can be both a godsend and a burden if you’re not too careful.

That’s why it’s important to do your research.

While it’s tempting to sign up for a flashy new platinum card, these can come at an equally flashy price.

If a deal sounds too good to be true, it probably is, especially with credit cards.

By shopping around and doing your research, you can find a card that offers you great value.

Compare Club weighs up the benefits of a range of credit cards^ side by side.

Here are a few things to look for while comparing credit cards.

What is the most common type of credit card?

Most banks and financial institutions offer an entry level card with basic features, an average interest rate and annual fee.

These are sometimes offered with bank accounts and home loans.

What are some of the key features of credit cards?

Here are some of the key features of credit cards:

• Cards have a set interest rate and most have an annual fee.

• You’ll also have interest-free days where you’re not charged interest for a set period – usually 55 days.

• Some have extra features and rewards.

What are some of the advantages of having a credit card?

Credit cards have many pros, which is why they’re so popular:

• It’s a convenient way to pay on the go

• They’re great for online shopping

• Balance transfer cards can help you pay off debt

• Most offer fraud protection

• They can help you build a credit rating

What are some of the disadvantages of having a credit card?

Credit cards can cost you in the long run so proceed with caution.

Here are some of the disadvantages:

• Interest can soon add up

• It can be easy to overspend

• Rewards will often cost thousands

• Your closing balance is considered a debt if you apply for a loan

Which card is right for me?

The first step is to work out what you’re using it for.

Do you want a convenient way to shop online?

Pay off debt through a balance transfer?

Or have it on hand for emergencies?

Decide on a credit limit.

If it’s too high, your finances could spiral out of control.

How much can you afford to pay off each month?

Most banks charge daily interest so if you’re one day late, they can charge you interest for the full interest-free period, usually 55 days.

If you don’t plan on paying off the balance every month, a no-frills card will offer the best value.

But if you’re a whiz at budgeting, you might prefer a card with frequent flyer points or rewards.

What is a low interest credit card?

If you want a credit card for everyday shopping and bills, a low interest card may be a good option.

While these cards often attract a higher annual fee, the reduced interest can save you in the long run.

What is a balance transfer credit card?

If you want to pay off a debt to get your finances on track, balance transfers can help.

But they only save you on interest if you pay off the transfer amount within the limited time.

And the low interest rate just applies to the transfer amount, not any extra spend.

If you don’t pay off your balance within the set time, your interest will jump up to 20% or more, which can defeat the purpose of transferring your debt in the first place.

It might be worth considering a personal loan if you have a large amount to pay off.

What is a no annual fee credit card?

You won’t pay an annual fee, which can be hundreds for a card with loads of features.

But make sure you read the fine print as interest rates and fees might be higher to compensate.

Also check for introductory periods, where the annual fee is only waived for a year or two.

What is a rewards credit card?

You usually need to spend a few thousand a month to justify the high annual fee for a rewards program.

With some cards, you’ll need a zillion points to qualify for a toaster.

And that zillion points equates to spending thousands of dollars.

It’s best to crunch the numbers to see if it’s worthwhile.

Better still, let us do the legwork and compare for you.

What is a cash back credit card?

This offers you cash back on your purchases.

Like rewards cards, you’ll usually pay more in interest and annual fees, and most cards have a cap on what you get back.

What is a frequent flyer credit card?

If you’re a points junkie who travels a lot, this is the card for you.

These cards link to airline programs like the Qantas Frequent Flyer Rewards Program, where you earn points on your spend.

Points can be redeemed for flights, travel and goods.

These cards usually have a minimum monthly spend and a higher interest rate.

You’ll also need to sign up for an airline program.

What is a platinum credit card?

This card comes with a range of extras (and fees to match).

This could include exclusive dining offers, travel discounts, travel insurance and more.

You’ll need to decide whether it’s worth paying extra for these benefits.

What is a black credit card?

These are usually reserved for big spenders who are prepared to pay hefty annual fees of around $425 a year*, along with a high sign-up fee.

You often need to earn six or seven figures and spend up big to qualify, with many cards having a minimum credit limit of $15,000*.

They generally offer higher rewards than other cards and come with extras such as complementary insurance on big purchases, a concierge service, and access to exclusive events.

Black cards may be an option for high-spending busy executives who need help with everything from organising travel to a child’s birthday party.

Whichever credit card you choose, the best way to stay ahead is to pay off the balance in full each month.

There are hundreds to choose from and they vary greatly.

So do your research and take the time to compare credit cards.

This guide is an opinion only and should not be taken as financial advice. Check with a financial professional before making any decisions.

^Compare Club compares over a range of credit cards from Big Banks, Specialist finance providers and directly from payment issuers. Compare Club doesn't compare all cards on the market and not all cards are available to all people. Our panel of credit cards will change over time. Customers should consider their personal circumstances before applying for credit.

*ANZ, ANZ Reward Card, accessed 11 November 2021.