A complete guide to credit card features

If you want to help minimise the costs of your credit card and reduce the chance of going into credit card debt, it’s important to understand credit card features and how to use them. This can often be difficult with some of the complex financial language used, so, we’ve put together this guide that could help you make the most of any credit cards you may have now or in the future.

A credit card looks and functions much like a bank debit card. The difference is, when you use a debit card, you’re paying for products and services with your own money. When you shop with a credit card, you’re paying with the lender’s money, and have to pay it back (usually with interest).

Banks and other financial institutions may loan money through a credit card as part of their business activities. You need to pay your lender for providing this service (usually this is in the form of regular fees and interest) and to compensate them for the risk they’re taking and the costs they incur to lend you money.

Once you spend any credit you’ve been granted, you’ll need to repay the debt, and you may need to add amounts of extra money to those payments. Those extra payments are the interest, based on the purchase rate or interest rate charged. The amount you pay will be a percentage of what you haven’t yet repaid per year (but usually paid monthly, fortnightly or even weekly).

Before you decide to apply for a credit card make sure you are comfortable with how it works, the commitment to paying back (with interest) any credit used, and the limit and features of the card. Applying for a credit card generally takes around three steps:

1. Check you meet the card’s eligibility criteria and that your credit score is aligned to the lenders requirements
2. Fill in an application form
3. Sign a credit agreement

Your lender will look into your credit history and your application to help determine whether you’re an acceptable level of risk. If the risk is too high, you may not receive credit card approval.

There are several things to be aware of when considering or comparing credit cards:

• Types of credit cards. There are several kinds and some may suit you better than others.
• Perks. Some cards offer benefits in addition to granting credit. For instance, some cards come with complimentary travel insurance of various kinds depending on the type of card. Others will deliver points when you make eligible purchases. You can then redeem those points for eligible products and services. Such perks are less likely to be available with low-interest-rate credit cards, but they do exist.
• Fees. Every credit card charges fees, even if those fees consist entirely of interest charges, which can be the case for some low-fee credit cards. For example, the lender may charge an annual or monthly fee that’s like an account keeping fee. Some lenders charge more (and bigger) fees than others.
• Terms and Conditions The terms and conditions of each credit card should include all the information you need to know in relation to your chosen credit card and how it operates. It’s important to ask if you need help understanding your card’s terms.

In addition to that, there are the key credit card features that are important to understand that may impact the way you use the card.

A credit limit is the maximum amount of credit your lender has told you you’re allowed to spend via your card.

Interest-free days give you a certain period of time to spend credit without having to pay interest on your debt. However, interest-free periods don’t start ticking down from the moment you buy a product or service. Instead, they begin at the start of your own personal billing anniversary date.

For example, if you buy a computer on the first day of your 55-day interest-free period, you’ll have 55 days to repay the debt before you pay interest. If, however, you buy the computer on the last day of your interest-free period, you’ll have to repay the debt the day you performed the transaction, otherwise you start paying interest.

Some credit cards offer extended interest-free periods as introductory offers while others may offer an introductory lower interest rate. Some lenders may even offer a card that charges a low introductory interest rate as well as interest-free days. Just be aware, many cards may become high-rate cards once that initial intro period expires.

If you have one or more credit cards on a high interest rate, you may have options from lenders to transfer that debt to a new card on a lower interest rate for a period of time. That’s a balance transfer, and it generally attracts its own interest rate.

Rewards credit cards are credit cards that offer perks and extra benefits, like free flight upgrades and cash back paid into your bank account or gift cards. You may collect rewards when you shop with your credit card which could save you money on many of your usual transactions.

Rewards cards and programs may attract higher interest rates and other fees, but some may also include additional features such as:

Lounge access: Some credit cards offer limited access or a number of passes per year to lounges of airlines they partner with. This feature is more commonly found with rewards or frequent flyer credit cards.

Concierge services: A concierge assistant could save you time and money by helping you with tasks like buying event tickets and booking holidays. Cards that include a concierge service usually offer access at any time and any day of the week.

A cash advance is when you take money out of your credit card account. Here are some examples of transactions that might be classed as cash advances:

• Taking cash out at an ATM
• Transferring credit from your credit card account to your bank account
• Any kind of gambling

These transactions generally attract their own dedicated cash advance fees and interest rates, which are usually higher than other credit card fees.

These days, most credit cards can be added to mobile payment platforms like PayPal, Stripe, Google Pay and Apple Pay, so you can shop with most shops online from anywhere in the world.

Contactless payment methods could allow you to buy things in-person without touching anyone, so you can maintain a safe distance from people if you need to.

Many credit cards charge a fee each year, usually to cover administration and other expenses. This is called the annual fee. Cards that offer more elaborate programs, such as rewards or perks, may charge higher annual fees.

Interest rates are per annum rates, which means the amount of interest you’ll be required to pay over 12 months. But you’ll pay parts of it regularly (e.g. monthly). An example would be 20% per annum (per year) which would work out to be about 1.67% per month.

Most lenders calculate the amount of interest you pay daily. So every day, the amount you have to repay to your lender grows by the interest rate per cent divided by the number of days in a year. So in our example, every day (in a year that’s not a leap year) the interest you have to pay would grow by 20%/365.

Credit card interest rates are usually compound interest rates, so that means every day when the interest due is calculated, it’s calculated on the original debt as well as any interest you owe. So, as an example, let’s say you owe $100 today. At a purchase rate of 20% per annum compounded daily, you would owe $100.05 tomorrow. (20% of $100 is $20. If you divide that by 365 you get $0.054795. If you add that to $100 you get $100.05.) The day after tomorrow, you would owe $100.11. (To get that number you would work out 20% of $100.05, divide the number by 365 and then add $100.05.) After a year, you would owe $122.13 (whereas with simple interest, you’d owe $120).

If you repay all your debt in full by the due date (the last day of your statement period), you won’t be charged interest again until you make another purchase. If you repay part of your debt, your lender will calculate the interest you owe based on whatever balance you have left in your account.

While credit card interest can be compounded daily, most lenders will only require you to make a mandatory monthly repayment — you won’t be expected to make daily repayments. However, you can pay more frequently if you want to try and reduce your total interest costs as much as possible.

Once you spend credit, you’ll be required to repay that debt by paying at least a minimum amount by a set due date each month. You can repay more than the minimum, and you can repay the debt in full at any time. But if you’re late making a mandatory repayment, your lender may charge you a late payment fee by adding it as another debt on your credit card statement.

If you're looking for a credit card, having a better understanding of how some of the key credit card features work can help when comparing credit card options and deciding what type of card may be suitable for your needs. If you want to start comparing, take a look at our credit card comparison page to compare a range of credit card offers.