What is a credit card?
A credit card allows you to borrow money from a bank or financial institution to make purchases for goods and services.
A credit card offers a revolving line of credit. This means you can access money up to a specified credit limit, which you need to repay, along with any interest, fees and other charges.
If you pay off your card's balance in full each month, you typically won't pay interest on your purchases. If you only repay part of your balance, interest is charged on the amount owing.
Credit cards incur fees other than interest, including annual or monthly fees, late payment fees, cash advance fees and international transaction fees.
It's important to note, that credit cards need to be used responsibly.
Access to instant credit can be a temptation to spend, and credit card issuers typically charge higher interest rates than other forms of credit, such as personal loans. Also, you can damage your credit score if you don’t make your repayments on time.
But if used responsibly, credit cards are a handy financial tool. They can smooth your monthly cashflow, provide access to funds in an emergency, and some credit cards offer perks such as cashbacks, frequent flyer points and complimentary insurances.
What is a credit limit on a card?
A credit card comes with a credit limit. This is how much can be borrowed, or spent, on the card. Once the limit is reached, the card can no longer be used to make purchases until the amount owed is reduced.
The limit on a card is set by its issuer, and is set according to the card-holder's income and credit history. However, at any time, a card holder can request the limit on their card to be raised or lowered.
It's important to note that the higher the limit on your credit card, the more your overall borrowing power will be diminished. For even if you never hit your card's limit, it's regarded as possible debt by lenders.
So if you're a prospective home buyer in the market for a mortgage, it's a good idea to keep your credit card limit as low as possible.
What are the different types of credit cards?
There's a range of different types of credit cards available:
Low rate credit cards
As the name suggests, a low rate credit card generally comes with a lower interest than other types of credit cards. These cards are usually no frills, meaning they don't offer some of the perks that other credit cards do, such as complimentary insurance or the ability to earn rewards points when you spend money using the card.
Is a low rate credit card right for you?
If you struggle to pay off your credit card bill in full each month and carry over debt from month to month, then the interest rate you pay on your debt should be your main concern. Which is when a low rate card can help, as it will help reduce the interest charges accruing on your debt.
A low rate card could suit someone who uses their credit card for:
- Everyday bills and expenses they can't afford to manage.
- For necessary big-ticket expenses they can't afford, such as medical bills, car repairs, a new computer, etc.
If you're constantly accruing interest on your credit card balance, don't be tempted by cards offering Airpoints or cashback dollars. Any rewards you earn likely won't be enough to warrant the higher fees and interest rates attached to such cards.
No annual fee credit cards
No annual fee credit cards are usually relatively basic cards which, due to the pared-back set of features on offer, do not charge an annual card fee.
Avoiding an annual fee can save some credit card holders hundreds of dollars per year, but the drawback is you may not have access to a rewards scheme or other benefits that premium (and more expensive) cards offer.
Bear in mind, too, that while there may not be an annual fee, other fees still apply. These can include cash advance fees, for withdrawing cash, and currency conversion fees, if you use the card to pay for goods or services overseas.
Is a low fee card right for you?
A low fee card is ideal for an occasional credit card user who always pays down their balance. For if they pay their bill in full each month, the card costs very little, if anything, to use, and offers a useful line of credit.
Before getting a low fee card consider:
- Will you spend beyond your limit? Even if you only use the card occasionally, if you end up with an outstanding balance, you could end up paying more interest than that offered by a low rate card.
- How often will you really use your card? If you end up using your card frequently, you may miss out on the benefits of a rewards card.
- What other fees or charges are involved? Are there minimum spending limits or high fees for late payments, for example?
Rewards credit cards
Rewards credit cards give you bonuses depending on how much you spend on your credit card. The credit card provider converts your spending into points, then into rewards when you redeem those points.
Such cards offer four main types of rewards:
- Cashback
- Merchandise
- Frequent flyer
- Discounts at point of sale
Rewards credit cards are generally more premium products than low rate or no annual fee credit cards, and tend to be more expensive to use, due to their higher fees and interest rates.
However, some people are prepared to pay the higher fees and, potentially, incur higher rates of interest, in return for the rewards on offer.
For if you manage your spending carefully, using your rewards card for all your spending, and not paying excessive interest costs, it's possible to earn more in rewards than the card costs to use.
Rewards cards can also come with other benefits, such as complimentary insurances, including purchase protection insurance and travel insurance if you book a trip using the card.
When applying for a rewards card, it's important to consider if your spending habits warrant the extra fees and charges involved, and if you will actually benefit from the rewards on offer.
Is a rewards card right for you?
Rewards cards tend to come with higher fees and interest rates. So they are not ideal for users who regularly have an outstanding balance.
Instead, rewards cards are great for those who spend within their limits, and use their credit card with the aim of accumulating rewards.
As long as you clear your outstanding balance each month, if you use the card for all your spending, you can amass hundreds of dollars of rewards, all for the cost of the card's annual fee. However, before applying for a rewards card, keep in mind:
- Are the rewards worth the fee? Rewards cards come with high fees. So if you're not putting enough on the card, and accumulating enough rewards, you may be spending more than you're saving.
- Are you overspending for the sake of rewards? For some, rewards cards can tempt overspending. It's easy to think "only XX more dollars and I'll earn another point". If you're buying for the sake of rewards, a rewards card may not be for you, especially if you're spending beyond your limits.
Frequent flyer credit cards
Frequent flyer credit cards also offer rewards and other perks to cardholders, but these benefits are generally linked to an airline's rewards program, such as Air New Zealand's Airpoints.
There may also be travel related perks for cardholders, such as complimentary passes to airport lounges and travel insurance.
Like rewards credit cards, frequent flyer cards tend to charge higher annual fees and higher interest rates than low fee and low rate cards.
Is a flight rewards card right for you?
Flight rewards cards are ideal for those who travel frequently, as the perks tend to be travel related.
However, Airpoints can be used to purchase a wide range of goods and services, so even those who aren't regular travellers can still get value out of this type of credit card.
However, keep in mind that to offset the higher fees and interest associated with rewards cards, you're best using a flight rewards card for all your spending to accumulate as many Airpoints as possible, and to pay your monthly bill in full.
Premium and platinum credit cards
Premium and platinum credit cards are generally the cards that come with the most valuable perks and rewards points. They are also typically the most expensive, particularly when it comes to their annual fees, which in some cases can be several hundreds dollars. Some lenders only offer their most premium cards to applicants with very high incomes.
Balance transfer credit cards
A balance transfer credit card is one that enables the card holder to transfer the balance of other credit card(s) they have to the new card. Many balance transfer credit cards allow new customers to get a 0% interest rate on their transferred debt for a set period.
The aim for the cardholder is to use the low-interest period to pay down their debt faster.
Balance transfer card providers offer different low- or zero-interest periods on their cards, and the rate only applies to the original balance transferred.
Balance transfer cards, things to consider:
- Once the introductory lower interest period ends, what interest rate does the card revert to? If you still have an outstanding balance, you'll be stuck paying this higher rate on your remaining debt.
- If you plan to continue using the card once the interest-free period ends, and accumulate more outstanding balance, is the card's interest rate competitive alongside other low rate cards?
How do rewards credit cards work?
Depending on the credit card and rewards program you choose, you can earn rewards points for each dollar you spend on the card.
You're then able to use (redeem) these points in various ways, according to the rules of the rewards scheme, such as exchanging them for a selected range of goods and services, or for discounts on such things as flights and accommodation.
Check whether the card caps (limits) the amount of rewards points you can earn, whether the rewards points can expire before you redeem them, and whether it's easy to redeem the points for the rewards you value.
What are the main types of rewards credit cards?
There are four main types of rewards credit cards:
- Cashback: rewards can suit credit card users who prefer cash or cash equivalents, such as gift cards.
- Merchandise (general rewards): rewards may suit customers looking for multiple options when redeeming points. Potential redemption options include gift cards, automotive services, entertainment, lifestyle products, food and beverages, or additional rewards.
- Frequent flyer (flight rewards): for customers looking for flights or other travel products.
- Instant rewards: offer an instant discount at point of sale on certain products.
How can you compare rewards credit cards?
To compare rewards credit cards, consider the following questions:
- What is the rewards program? Does the program suit your credit card usage habits? Does it offer rewards that you are interested in?
- How can you earn points? How many points can you earn per dollar spent? Are there any conditions or point caps? Do the rewards points expire?
- What is the cost of having the card? Is the card's annual fee worth the amount of rewards you can earn? Are there any costs associated with being a member of the rewards program? What is the interest rate?
- Are there any other features on offer? Some rewards credit cards also offer extra perks, such as complimentary travel insurance, purchase protection insurance and lounge access.
What are the potential benefits of having a rewards credit card?
Some potential benefits of having a rewards credit card are:
- Earning points: the main benefit of a rewards credit card is that you can earn rewards points on your eligible spending. These points can be redeemed for things like cashback, frequent flyer points, merchandise and discounts on your shopping.
- Extra features: rewards credit cards can often come with extra features like complimentary insurance cover.
- Bonus offers: rewards credit cards may offer bonus rewards points for new customers when they spend a certain amount within the first few months of having the card.
What are the potential drawbacks of having a rewards credit card?
Some of the drawbacks of having a rewards credit card are:
- Higher annual fees and interest rates: rewards credit cards generally charge higher annual fees and interest rates than non-rewards cards. This means you will pay more for the card, particularly if you don't pay off your balance in full each month.
- Rewards conditions: you will usually only earn points on eligible spending. There may also be caps on the number of points you can earn, and the value of the points you earn can vary across different cards and rewards schemes.
- Temptation to overspend: a rewards credit card may encourage you to spend to earn more points, which can lead to overspending.
What is an eligible purchase on a rewards credit card?
Most everyday purchases are eligible. But there will be certain transactions that are excluded, as determined by the credit card provider. Common exclusions include interest, fees and charges, cash advances, balance transfers, government-related charges and gambling-related purchases.
How do you redeem credit card rewards points?
The exact process depends on your credit card provider. But generally, you can redeem your credit card rewards points online.
Cashback rewards are often paid automatically into the card-holder's account annually.
Are rewards credit cards worth it?
Whether or not rewards credit cards are worth it depends on how you use your credit card. Rewards credit cards typically charge higher annual fees and interest rates than non-rewards cards. So before applying for one, consider whether the rewards on offer justify the card's higher user costs.
If you use your credit card a lot and pay off your balance each month, using a rewards credit card may be worthwhile. But if you carry a balance on your card, you'll likely spend more in interest than you will gain in rewards.
How do credit cards' interest-free periods work
Credit cards offer a revolving line of credit and an interest-free period, usually 44 or 55 days, during which you can make multiple purchases against your credit limit.
Each interest-free period begins on the first day of the card's monthly statement period. So, only items bought on the first day of this period will take advantage of the full number of days offered interest free.
At the end of each statement period, you'll receive a bill for the items purchased over the past month, with a settlement date set at the end of the interest-free period.
So, for example, if a card offers 55 days interest free, if the monthly statement period is from June 1 to June 30, the bill will need to be paid by July 25, which is 55 days after the first day of that statement.
If you pay off the total amount owing by the bill's settlement date, you'll not pay any interest.
However, if you make only a partial payment, you'll lose your interest-free period and start paying interest on any outstanding balance until you clear your debt.
Complementary credit card insurances
Some credit cards offer additional insurance benefits, these can include:
- Extended warranty
- Price protection insurance
- Purchase protection insurance
- Travel insurance
Extended warranty
Extends the manufacturer's warranty period on items bought on the card, usually between six and 12 months, depending on the manufacturer's warranty.
Price protection insurance
If you make a purchase on your card, and then see the item cheaper elsewhere soon after, price protection insurance will cover the difference between the two prices.
Purchase protection insurance
Provides general insurance cover against loss, theft, or accidental damage, for items bought on the card, usually for up to three months.
Travel insurance
Some premium credit cards offer complementary travel insurance if you use your card to book your overseas or domestic travel arrangements. For more on what's on offer, check out our story Credit Card Travel Insurance.
What are credit card chargebacks?
If you've ever bought something online, only for it to never be delivered. Or, for it to show up but looking nothing like its online picture, then you could be eligible for a credit card chargeback.
A credit card chargeback is a refund issued by your card provider. It can occur when it's deemed that your money should be returned to you, but the merchant (seller) is not doing so. As a result, your card issuer steps in to perform the transaction.
Instances when you could be eligible for a chargeback include:
- A company refuses to fulfil a money-back guarantee, or other form of refund.
- Items you purchased were not as advertised, or arrived damaged.
- The purchase sum was charged to your card multiple times.
- Your card was used after being stolen, or used fraudulently.
- You paid for good or services but never received them.
- You were charged after cancelling your order or subscription.
To apply for a chargeback, contact the issuer of your card as soon as possible.
What credit card networks are there?
There are three main credit card networks:
- American Express
- Mastercard
- Visa
Visa and Mastercard are payment processing systems. They don't issue any cards directly to consumers, instead they charge financial institutions to use their systems and to brand their cards accordingly.
Visa and Mastercard are both widely accepted, and it's very rare to find a location that accepts one but not the other.
In contrast, Amex owns its own payment system and issues its own cards directly to consumers, and is less widely accepted – although most major retailers accept Amex, alongside Mastercard and Visa.
What are gold and platinum credit cards?
A gold card is no longer the gold standard of premium credit cards. In fact, there's only one gold card on offer in NZ: the American Express Gold Rewards Card. All the other premium rewards cards are platinum cards, even though very few of them are actually platinum in colour.
Platinum cards are available from these providers:
- American Express
- ANZ
- ASB
- BNZ
- Kiwibank
- TSB
- Westpac
There's no strict definition of what constitutes a platinum card, although most:
- Are a rewards credit card.
- Come with benefits not available on a standard card from the same issuer, such as complimentary international travel insurance.
- Have higher interest rates and fees than a regular no-frills credit cards.
- Offer higher credit limits (but also require an applicant to prove a higher level of income).
Benefits vary from card to card, but most platinum cards offer:
- Attractive rates on rewards points, often accompanied by a very high, or non-existent, cap on the number of points you can earn.
- Complimentary travel insurance.
- Concierge services, for example, assistance with booking accommodation or travel arrangements.
- Airport lounge passes.
However, while platinum cards offer perks and benefits, even if your spending habits are immaculate and you clear your balance each month, their fees are higher than no-frills cards. So, when deciding if a platinum card is the right credit card for you, it's important to work out if its benefits outweigh its higher costs.
What are black credit cards?
Quite a few of the platinum credit cards on the market are coloured black. However, when most people talk of a black credit card, they are thinking of American Express' Centurion credit card.
This is an invite-only card offered to big spenders who annually put hundreds of thousands of dollars on their plastic and costs thousands in annual fees. It's also issued by American Express in New Zealand.
What credit card fees are there?
Depending on how you use your credit card, they can be an expensive way to access funds, but some of the fees are avoidable. Here are some of the common credit card fees that may apply depending on the card you choose:
- Annual fee: charged for administration of your line of credit. Some cards come with no fees, while ones that offer premium extras, cashbacks and rewards can charge hundreds of dollars per year.
- Additional cardholder fee: charged to issue a second person with a card linked to the rewards credit card account. Fee costs can vary greatly.
- Balance transfer fee: charged to transfer the balance of another credit card onto your rewards credit card. It may be charged as a percentage of the amount you transferred.
- Cash advance fee: charged when you use your credit card to get cash out from an ATM, buy foreign currency, or buy travellers cheques.
- International transaction fee: charged to process purchases you make while overseas, or purchases made in a currency other than New Zealand dollars. These fees are a percentage of the purchase price, so can quickly add up.
- Late fee: charged if you do not pay the minimum amount due on your monthly bill. Instead of waiting for your bill to pay it, you can set up a direct debit automatic payment with the bank for the minimum amount every month.
- Over-limit fee: charged when you spend more than your credit card limit.
- Non-bank ATM fee: charged by your bank when you use an ATM from a different bank to make a balance enquiry or cash withdrawal.
- Replacement card fee: charged if your card is lost or stolen and is replaced with a new card.
What type of credit card should I get?
It's important to consider your circumstances when choosing what type of credit card is right for you, including:
- How you'll pay off your credit card.
- How much you'll spend per year on your card.
- Whether the annual fee and other costs of a rewards program are worth it.
- If opting for a rewards card, what type of rewards you're most likely to use.
- Whether you already have credit card debt.
If you’re already struggling with debt, or aren’t sure if you’ll be able to afford to pay off your credit card balance each month, it may be worth reconsidering whether a credit card is the right option for you.
What type of credit card spender are you?
Canstar has identified four main types of credit card spender:
- Low rate
- Everyday spender
- Occasional spender
- Big spender
1. Low rate
A low rate spender is someone who uses their card frequently, but struggles to pay off their monthly bills in full. For example, they'd typically spend $14,000 a year, while constantly revolving a debt of $9000 on their card.
A low rate spender should consider a card with a low interest rate and a low annual fee.
2. Everyday spender
Someone who uses their card frequently every month, but is able to pay off the card in full each month.
As an everyday spender never pays interest on their card balance, a low- or no-fee card with a maximum number of interest-free days provides a usefully source of revolving credit for little or no cost.
Depending on their overall annual spend, they could also consider a rewards card, as long as the benefits outweigh the cost.
3. Occasional spender
An occasional spender is someone who keeps a credit card in reserve for big ticket items, such as holidays, or in case of emergencies, and then pays off the balance over a few months.
For an occasional spender, a low-rate/low-fee card provides a cheap form of readily available credit.
4. Big spender
This is somebody who spends a lot on their card, and always pays their bill in full to avoid interest payments.
Rewards cards are a great option for big spenders, because even after paying the higher annual fees associated with rewards cards, big spenders can accrue hundreds, or even thousands, of dollars' worth of perks.
Should you switch credit cards?
Switching credit cards can be a simple way to better manage debt, pay lower fees or earn better rewards. Good reasons to swap your credit card, include:
You're on the wrong type of card for your needs
Getting the most from your credit card involves having the right card. If you're struggling to pay off your balance, and are using a rewards card, you could be getting hit with higher interest rates than you need to.
Likewise, if you're putting everything on your card and repaying it each month, are you getting the full rewards benefits possible?
Or, if you only use your credit card for the odd big expense, is there are zero-fee card available?
You can get a better interest rate
Even if you have a low rate card, it may not be the lowest. Credit card companies often change their interest rates, so it's important you compare credit card providers regularly to find the best rates available.
You can get better rewards
Could you earn better rewards by using a different card? Credit card providers often have their own rewards systems, so it may take a little research to find which has the best dollar value rewards.
For example, one card might offer one point for every dollar spent. While another might offer one point for every $100.
Keep in mind, switching rewards cards doesn't mean you have to switch card provider. You may find that you can get better value from upgrading from your current rewards card to a platinum rewards card with your existing card issuer.
For more information check out our story NZ's best-rated rewards & Airpoints credit cards.
To take advantage of balance transfers
Credit card balance transfers can be a useful tool to better manage credit card debt. A credit card balance transfer involves transferring your debt from one card to another to take advantage of special interest rates.
These special interest rates are typically offered for a set period, such as six months, but can extend to the life of the extended debt.
For more information check out our story Best balance transfer credit cards.
Things to consider before you switch credit cards
Switching credit cards can be a great way to get a better deal on your credit card. But there are certain things that should be considered first:
- The costs: there can be costs involved when switching credit cards, for example, increased annual fees, or higher rates of interest.
- Credit cards can be good and bad: credit cards can help you manage debt or make the most out of your spending. But they can also just lead to debt. Make sure that you consider all your options, and your savings goals, before applying for any new credit cards.
- Credit checks: when opening a new credit card you may be subject to a credit check. This can cause a dip in your credit score. While temporary, it should be taken into account if you intend to apply for a personal loan or home loan in the near future.
- If applying for a balance transfer: consider the interest rate the card will revert to after the initial interest-free (or low interest) period plus any ongoing costs.
Six steps to reducing credit card debt
If you've a big credit card balance that you can't shift, here are some simple strategies that could help you to pay off your credit card debt, and get your finances back on track.
1. Put your card on ice
If you're aiming to scale back card debt, try tucking the credit card away for a while and removing it from your digital wallet. This can help to curb spending at least until the outstanding balance reaches a more comfortable level.
2. Pay more than the minimum
Sticking to a card issuer's minimum repayments will drag out the time it takes to clear the balance of your debt. Paying more than the minimum reduces your interest charges and helps you get ahead of your credit card debt sooner.
3. Make early payments
You don't have to wait until your monthly statement arrives to make a card payment. Cardholders can usually make a payment at any time (especially through online banking). This further helps to reduce your credit card debt, and lower monthly interest charges.
4. Make payments on time
Missing a credit card repayment can see you slugged with a late payment fee. While only around $6 per missed payment, it does add to your card balance, and continually running behind with payments can damage your credit score.
5. Focus on higher rate cards first
If you have debt on more than one credit card, it's a good idea to prioritise repaying the debt on the card with the highest interest rate, in order to save on interest payments.
For example, aim to pay off a card with a rate of 20% first, before turning your efforts to a card charging 12%.
6. Consider a balance transfer card
Another option to think about if you're paying down a large credit card debt is a balance transfer offer. This involves moving your debt to a new card charging a special low, or even zero, rate for an introductory period.
