How do credit cards work?
Think of credit cards as a short-term loan where you use the bank’s money to buy something up front and then pay for it later. Unlike a debit card which uses your own money to pay, a credit card essentially borrows the bank’s money to fund the purchase. When you apply for a credit card, the bank assesses your income and assigns you a credit limit based on what you can afford to pay back. At the end of each billing cycle, which is usually monthly, the bank will send you a statement showing the minimum amount you have to pay back, including any interest payable on the balance.
Credit card interest can quickly turn a manageable balance into unmoveable debt. So being able to understand how interest rates translate into dollars is an important skill to acquire.
The common mistake people make is focusing on the credit card’s annual percentage rate (APR), which often sits between 15 and 20 per cent. While the APR does provide a rough idea of how much interest you’ll pay, it’s not entirely accurate.
This is because you actually accrue interest on your balance daily, not annually. So, you need to work out your daily periodic rate (DPR). To do this, divide your card’s APR by the number of days in a year (e.g. 16.9 per cent divided by 365, or 0.05 per cent). You can then apply this figure to the daily balance on your credit card.
Credit cards are a personal responsibility, so the reasons behind getting a credit card should also be personal.
You should always consider all the pros and cons of taking out a credit card before you sign on the dotted line.
For example, pros include the fact that credit cards can be a good way of paying for purchases, earning rewards points and building a credit history.
But there are also cons – credit cards can be expensive and put a lot of financial pressure on you.
You need to consider your personal finances and your lifestyle choices. Do you need a credit card? What options are out there for me? Can I handle the repayments? Why am I getting a credit card in the first place?
Credit cards can be useful, provided you understand the risks. If you’re wondering about how to make a credit card online application, here are some steps to follow:
- Test the market – Many credit card options are available online. Compare providers by fees, interest and perks to ensure you’re getting the best deal.
- Complete the application – Once you’ve selected a card, head to the provider’s website and complete the online credit card application form. Forms vary by providers.
- Provide details – Most cards require you to meet age, residency, income and credit status condition, and you need to provide details like a bank account statement to prove this.
- Review details – Ensure the information you’ve entered is correct.
Looking to get your first credit card? You might be confused as to exactly where to go to apply for one. Here’s where to go when you are ready to put in that application.
The bank: Your bank is a great place to start, provided that you have a good banking history. Since you already have a financial history, you have more chance of your application being approved.
Credit card provider: Another option is to apply for a credit card directly from the issuer, such as Visa, Mastercard or Amex. This will most likely be an online application, so do your research and apply for a suitable card for your circumstances.
Major retailers: Coles, Woolworths, Myer and David Jones all have credit cards available. But watch out for the interest rate and annual fees – these cards are designed to help you spend more in store.
To get a new credit card, generally you need to be at least 18 years old and have a good credit rating. You don’t need to be an Australian citizen. Usually you can apply online or in person at a branch of the card issuer. You’ll typically have to supply information like:
- What you regularly earn (e.g. wages, salary) and what you regularly spend (e.g. rent/mortgage, loan repayments, living expenses)
- Your employer’s contact details
- Details of your assets and any debts you are paying off
Before applying for any credit card, be sure you can afford the repayments. It also helps to do some research, comparing different credit cards and what they offer in terms of fees, interest, rewards etc.
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