What is a Credit Card?
A credit card allows you to borrow money from your bank up to a pre-approved amount. It allows you the flexibility to manage your day to day finances without having to apply for a personal loan.
What is a credit card? Essentially, a credit card:
· Allows you to borrow money from the bank up to an agreed limit.
· Usually has a set interest rate.
· Can have an interest-free period of up to 60 days.
· Has a minimum monthly repayment.
· Sometimes comes with a reward scheme.
When you use a credit card to pay for things, you'll be charged interest on each payment, unless you pay off the charge within a certain period.Your interest rate is determined when you sign up for the credit card.
Certain credit cards offer interest-free periods, which can sometimes be as long as 60 days. Depending on the type of credit card, your spending can be linked to a loyalty program such as Qantas Frequent Flyer or Virgin Velocity.
When are credit cards useful?
Credit cards shouldn’t be considered a cash replacement, as anything you borrow must be paid back. But they can be very useful to get you by between pay cheques. They can also be useful when you need to pay for a large or unexpected expense, such as a new fridge.
Let’s say, for example, you’ve been budgeting carefully each month to cover your ongoing finances, but an unexpected expense throws everything off. This might include:
· Car registration
· Utilities bill.
· Medical expenses.
· Council rates.
A credit card can cover these life expenses in one hit, allowing you to gradually pay them back over time.
Credit card terminology
For first-time users, understanding these common credit card terms can help you effectively manage your finances.
· Credit limit: The pre-approved amount your financial institution will allow you to borrow using your credit card.
· Credit report/score: This score, or report, is based off your ability to pay back debt on time and can impact your ability to borrow money in the future.
· Minimum payment: This is the lowest dollar amount required to satisfy your monthly credit card statement.
· Interest rate: The percentage of interest charged on your outstanding credit card balance each month.
· Grace period: The amount of time you have to pay back any money borrowed on your credit card before incurring additional interest fees.
How to apply
Getting your hands on a credit card is easier than you think. Start by finding a suitable credit card. Once you apply, the bank or financial institution will then review your current credit report, any credit history, your employment status and a number of other factors before deciding whether to approve your application. If your financial position is deemed eligible to satisfy the minimum repayment requirements for a credit card, you’re good to go.
What should you consider before applying?
It's important to think about the following points to ensure you find the right card:
- Can you cover the minimum monthly repayments?
- How long is the grace period?
- What are the annual fees?
- Does the card have a rewards program?
- Does your monthly credit limit exceed your monthly income?
Research your options thoroughly and look at the different cards on offer to find one that matches your financial position and spending style.
Start comparing credit cards today to find one that offers all the features you need.