BEGINNERS GUIDE TO CREDIT CARDS

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Beginners Guide to Credit Cards

Ahh credit cards, those mysterious little bits of plastic. The James Bond of the banking world, they’re powerful, dapper and a little bit risky. They can either help you prove your financial stability or turn you a little bit wild.

For the uninitiated, a credit card basically allows you to spend money you don’t have yet, and then pay it back, either monthly or by arrangement, when you do. If you’re organised enough to pay the money back within the interest free period and you haven’t made any cash advances (ATM withdrawals) - as these incur interest - there are no extra fees. But if you miss your repayment deadline, you will probably owe the bank more money, sometimes upwards of 20% of what you borrowed, with extra fees and charges to boot.

The first step to getting a credit card is to understand all that banking terminology, which, let’s face it, can be pretty confusing. A good starting point is to try to understand the following terms, then break them down and compare them between different credit card providers when choosing the card that’s right for you.

Terminology

Interest

This is the money that you have to pay back if you miss your repayment deadline or use the card to get cash out directly from the card account. It’s just like how a regular loan would incur interest. Different credit cards will have different interest rates, which are calculated as a percentage per annum.

Percentage Per Annum

Per annum is Latin and basically translates to “each year”. So percentage per annum is the percentage of money that you need to pay back calculated over the year. This can vary, depending on whether your bank calculates simple interest or compound interest, so it’s worth asking your bank how they calculate interest for the card option you might be considering.

Simple Interest

Simple interest is the most basic way of calculating interest. Essentially, it’s determined by the principal amount (in other words, the initial amount) you borrow or spend on the account, where interest is calculated on that principal amount only. Say you borrow $100 at 5% per annum, at the end of the year you will owe $105 (that’s 5% of $100 if maths ain’t your forte).

Compound Interest

Compound interest is a bit more complex – it’s where the interest is calculated on the principal amount borrowed, plus the interest that gathers in the mean time. It’s kind of like interest on interest. The amount of compound interest you accumulate will depend on how frequently it is compounded, or in other words, how many compounding periods there are. For example, compounded “monthly” means you will earn compound interest 12 times in a year as there are 12 compounding periods.

Interest Free Period

is the amount of time you have to pay the money you have spent on purchases on your credit card back before you have to start paying interest. This period is commonly between 30 and 55 days, but it depends on which credit card you choose.

Minimum Repayments

This is the minimum amount you must pay back each month on your credit card account to stay in your bank’s good books and prevent you from getting charged late fees or other charges. With some cards it’s a flat fee (usually around $25), with others it’s calculated as a percentage of your monthly closing balance (such as 2 or 3 %). You can obviously pay more or all of your account if you wish to, you’ll simply incur interest on whatever amount of your bill you don’t pay off within that cycle.

Fees

Annual Fee

This is the fee you pay each year to have that specific credit card product. Some cards do not charge an annual fee, while others have an initial cost and lower annual fees.

Late Payment Fee

This is an extra flat fee charged for failing to make your minimum repayment each month.

Cash Advance Fee

This is the fee you pay to take cash out at the ATM via your credit card (like you would with a regular bank card).

Overseas Transaction Fee

This is a fee that you pay when you make a transaction overseas, either while travelling, or locally, with a merchant that is located overseas.

Some of that bank jargon can seem a bit dry and complex, but it’s worth knowing about. And the premise is pretty simple really: if you’re responsible about paying off your credit card purchases each month, it won’t cost you any more than the annual fee. If you don’t pay off your card each month, it could end up costing you much more. Just make sure that you’re ready for a credit card before you fully commit. Otherwise, you could consider a simple debit card that is linked to your everyday bank account.

This information is intended to be general in nature only and should not be relied upon for personal financial use. When in doubt, always seek professional guidance.
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