How do credit cards work?

A credit card could be a handy addition to your financial toolkit, allowing you to earn rewards, access extra funds when you might need them, and enhance your purchasing power. But to get the most out of a credit card, it’s a good idea to understand how it all works.

In this guide, we’ll break down things to note about credit cards, from the different types available, to fees, interest rates, and making informed decisions. Whether you’re a seasoned cardholder or uncertain first timer, we’ll help navigate the ins and outs of all things credit cards.

What is a credit card?

A credit card is a payment card issued by a financial institution – typically a bank – that allows you to borrow money up to an approved limit. It’s a card with a set limit to make purchases, pay bills, or withdraw cash.

Many credit card providers, like Westpac, issue credit cards supported by Mastercard® or Visa schemes. These credit card schemes provide a global payment network that processes card payment globally, which makes credit cards a convenient option to pay for things at participating merchants in most places around the world.

Debit cards vs. credit cards

A debit card lets you directly access your own funds from your bank account while, as the term suggests, credit cards allow you to borrow money by giving you access to a line of credit that needs to be paid back every month.

Credit cards may offer rewards but can also carry interest charges. Debits cards carry no interest charges but don’t build credit history.

How does a credit card work?

Credit cards work by letting you borrow and spend money up to an approved limit.

The card issuer pays the merchant on your behalf, and you’re then responsible for repaying the amount borrowed. You’ll receive a monthly statement detailing your transactions, total balance, the minimum monthly payment amount, and the repayment due date.

What is the credit limit?

When you apply for a credit card, you can choose your preferred credit limit, or pick the maximum available credit based on our assessment of the information you provide in your application.

Minimum credit limits may apply for certain cards, so you will need to nominate your preferred limit with this in mind. Over time, with responsible use, you could also apply for an increase in your existing credit limit.

What is interest and how does it work?

Interest is the cost of borrowing money using your credit card. If you don't pay off your full outstanding balance by the end of the statement period, you will incur interest charges.

Many credit card issuers offer an interest-free period so you can repay your balance for new purchases within the specified timeframe without incurring interest charges.

How do credit card rewards work?

Many credit cards allow you to earn rewards points on eligible purchases. These points can be redeemed for different things including lifestyle products, gift vouchers and frequent flyer points across a range of airline programs.

In addition, most rewards credit cards offer customers the ability to earn bonus points and redeem points online.

What is the minimum payment?

Each month you will receive a statement that will show you how much your minimum monthly repayment will be and when it’s due.

If you don’t choose to pay off your balance in full, you can opt to make the minimum payment shown on your statement by the due date.

We recommend that you aim to pay off more than your minimum repayment. Paying only the minimum repayment may take years to pay off your outstanding balance as it incurs interest charges.

What is a balance transfer?

A balance transfer is an optional feature of a credit card that allows you to request to transfer non-Westpac credit card balances to a Westpac credit card.

This could be beneficial if you find a card with a lower interest rate, as you could save on interest and repay your debt faster. Be aware of balance transfer fees and the interest rate after any promotional period ends.

What is a cash advance?

A cash advance transaction allows you to use your credit card to withdraw cash from your credit card account using an ATM. It’s important to note that cash advances typically come with higher interest rates and a cash advance fee compared to regular card purchases.

What fees should I be aware of?

As well as interest, it’s important to understand the different fees for each card you apply for, including an annual fee, late fees, cash advance fees, balance transfer fees, and foreign transaction fees. Some credit cards offer low-fee or no annual fee options.

Personal loans vs credit cards

A personal loan provides you with a sum of money that you repay in fixed instalments over a set period. This may be more suitable for large, planned, one-off expenses.

Credit cards can offer convenience and rewards for everyday spending, giving you access to money as and when you need it. 

Different types of credit cards

Westpac offers a range of different credit cards designed to suit your individual circumstances, so it’s important to consider how you’ll be using your card.

The Westpac Low Rate credit card offers a low ongoing interest rate, while the Westpac Low Fee credit card offers no annual fee with minimum spend requirement, and the Platinum and Black rewards cards allow you to redeem points for gift cards or frequent flyer points.