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How do credit cards work? A guide for dummies and beginners

Understand how credit cards work, what they cost and what types are available for first-timers.

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Maybe you’ve never had a credit card, or you don’t fully understand how they work. If this is the case, use this guide to understand the key features and standard cost of a credit card so you can find the right one for your budget and spending habits.

You can also discover which types of credit cards are best suited to beginners, and the mistakes you should avoid to get your credit card history off to a good start.

How does a credit card work?

A credit card is an unsecured revolving line of credit, meaning you can borrow money to make purchases without having to put up collateral.

Unlike a debit card that uses your money to make purchases, when you use a credit card, you are borrowing the bank’s money. At the end of your billing cycle, you receive a statement that tells you the total amount you owe for all of your purchases for that period.

Based on your perceived ability to make repayments, your income, credit history and credit score, your credit card issuer assigns a credit limit. This is the maximum amount of money you can borrow. Some cards have a lower minimum credit limit, while other cards have a minimum limit of $5,000 or more.

In New Zealand, the main credit networks used are Visa and Mastercard. Visa and Mastercard don’t actually issue credit cards, but instead, major banks do so on their behalf. American Express is another credit card network, which issues cards directly to customers.

Eligibility requirements

To be eligible for a credit card, you’ll need to meet the following criteria. Note that some cards may have additional requirements.

  • Minimum income. This is how much you need to earn every year to be eligible to apply. The credit card issuer wants to make sure you can make credit card repayments after your other monthly expenses are met.
  • Age. You must be over the age of 18.
  • Residential status. You must be a citizen or a permanent New Zealand resident. Some financial institutions offer credit cards to applicants with a student or temporary resident visa.
  • Good credit history. You must have a good credit history to be eligible to apply. This includes no current defaults. If you have not built up a credit history to date, you will not be penalised but may only be eligible for a low credit limit. As you build a credit history by using your credit card you can apply for a limit increase later.

Credit card interest and fees

When you apply for a credit card, it’s important to be aware of associated costs. These include:

  • Annual fee. This is the cost to own a credit card. The annual fee ranges from $0 to hundreds of dollars depending on the credit card type. The credit card annual fee is deducted from your available credit and accrues interest at the purchase rate if you don’t pay it in the first statement period.
  • Interest. Interest is the price you pay to borrow money. Credit card interest rates are much higher than other types of finance because credit cards are an unsecured product and financial institutions have no recourse to take your assets if you default on repayments.
  • Other fees. Other fees you may run into include late payment fees, over limit fees (a fee for spending past your credit limit), rewards programme membership fees and cash advance fees.

As you spend on a credit card, your debt begins to collect interest if you’re unable to pay back the whole balance by the end of the statement or interest-free period.

  • If you use your card for purchases, it starts collecting interest charges (usually between 13.45% and 20.95%).
  • If you use your card for an ATM withdrawal or any other transaction that’s considered a cash advance, you accrue the cash advance rate of up to around 22.95%.
  • If you decide to balance transfer your debt down the track, you also accrue a balance transfer interest rate (which is usually the same as the interest rate or cash advance rate). Some cards do offer 0% promotional periods on purchases and balance transfers, so this is something to bear in mind during your comparison.

Aside from interest rates, the main cost that comes with a credit card is the annual fee, which can vary from $0 to approximately $390 p.a. depending on the card.

Credit card features explained

  • Credit limit. This is the maximum amount of money you can borrow using your credit card.
  • Interest and interest-free days. Interest is the cost to borrow money using a credit card. The interest varies depending on whether you use your credit card for a purchase or cash advance. Pay your balance in full by the statement due date and you get up to a number of interest-free days on purchases in the next statement period. Up to 55 days is the typical interest-free period.
  • Balance transfers. A money-saving credit card feature, where you transfer your existing credit card debt to a new credit card with a different provider. You receive a special interest rate on the balance transfer amount for a limited time.
  • Cash advances. Using your credit card to get cash from an ATM, for gambling purchases or paying certain bills are cash advance transactions. Cash advances attract a cash advance fee.
  • Rewards programmes. A value-adding feature, where you receive points in a rewards or Airpoints (frequent flyer) programme when you use your credit card to make eligible purchases.
  • Contactless payments. For purchases under NZD$80, tap your credit card against a contactless reader to complete a purchase in seconds.
  • Extra features. Credit cards may come with extras such as complimentary international travel insurance, purchase protection insurance, extended warranty and best price guarantee cover, complimentary airport lounge access or platinum concierge services.

Paying off your credit card

Each month, you receive a statement that details the transactions you’ve made, the total outstanding balance and any interest accruing. While you’re only required to pay a minimum repayment each month (2-5% of your total balance), it’s best to pay as much as you can to limit the amount of interest you pay.

If you pay your balance in full, you can usually take advantage of up to 44 or 55 interest-free days in the next statement period (This consists of your 30-day statement cycle and up to 25 days until the payment due date). If you don’t pay your entire balance in full, the remainder starts to collect interest. If you miss the minimum repayment, you could be charged late payment fees.

    pile of colorful credit cards

    What types of credit cards are suitable for beginners?

    In New Zealand, Visa, Mastercard and American Express issue credit cards. There are many types of credit cards with different features for different kinds of borrowers. Low-rate credit cards feature a low purchase rate of interest and annual fee, whereas rewards credit cards feature high rates of interest and annual fee, but reward cardholders with points for purchases. It is usually wise to begin with a no-frills credit card so you can get a grip on how credit cards work, before upgrading to a product with bells and whistles.

    These types of credit cards are suitable if you’re just starting out:

    • Low interest credit cards. Low-interest rate credit cards typically feature a low purchase rate of interest, which is beneficial if you don’t pay back your balance in full by the statement due date. These types of credit card may also feature a promotional period in which you pay low or no interest on credit card purchases. Low-interest credit cards are suited to beginners still finding their feet making repayments. Paying off debt over a couple of months is far cheaper with a low-rate credit card compared to a rewards or premium credit card.
    • No annual fee credit cards. This type of credit card costs nothing to own, but, the rates of interest are usually higher than low-rate credit cards. A no annual fee credit card can sit in your wallet, never come out, and won’t cost you a thing. These types of credit cards are suited to beginners who are looking to build their credit history but don’t want to go all-out on a credit card with loads of features.
    • Low income credit cards. Low minimum income credit cards have a low credit limit. The credit card company wants to make sure you can comfortably make credit card repayments after all your other monthly expenses are met. Low-income credit cards are typically either low rate or low fee credit cards and are suited to beginners who either have a low income or want a low-credit limit to avoid the temptation to overspend.
    • Student credit cards. Students looking to avoid paying a high annual fee and high rate of interest can check out credit cards offered in tertiary banking packages at major banks.

    Compare No Annual Fee, Low Income and 0% Purchase Cards

    Data indicated here is updated regularly
    Name Product Purchase Rate Interest Free Period Annual Fee
    American Express Airpoints Card
    0% for 6 months (reverts to 19.95% APR)
    Up to 55 days on purchases
    $0 p.a.
    Be rewarded with 50 bonus Airpoints Dollars. Simply apply, be approved, and spend $750 on your new Card in the first 3 months of membership. This offer is available to new Card Members only.
    Warehouse Money Visa Card
    19.95% APR
    Up to 55 days on purchases
    $0 p.a.
    Kiwibank Zero Visa
    13.95% APR
    Up to 55 days on purchases
    $0 p.a.
    ANZ Low Rate Visa Credit Card
    12.9% APR
    Up to 55 days on purchases
    $0 p.a.
    ASB Visa Business Credit Card
    20.95% APR
    Up to 50 days on purchases
    $30 p.a.
    loading

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    Data indicated here is updated regularly
    Name Product Purchase Rate Interest Free Period Annual Fee
    American Express Airpoints Card
    0% for 6 months (reverts to 19.95% APR)
    Up to 55 days on purchases
    $0 p.a.
    Be rewarded with 50 bonus Airpoints Dollars. Simply apply, be approved, and spend $750 on your new Card in the first 3 months of membership. This offer is available to new Card Members only.
    ANZ Low Rate Visa Credit Card
    12.9% APR
    Up to 55 days on purchases
    $0 p.a.
    TSB Visa Classic Credit Card
    18.5% APR
    Up to 55 days on purchases
    $30 p.a.
    ANZ CashBack Visa Credit Card
    19.95% APR
    Up to 55 days on purchases
    $60 p.a.
    BNZ Lite Visa
    12.9% APR
    Up to 55 days on purchases
    $30 p.a.
    BNZ Advantage Classic Credit Card
    20.95% APR
    Up to 55 days on purchases
    $40 p.a.
    Get 1 Fly Buys point for every $40 of eligible spend or $1 Cash Reward for every $150 of eligible spend.
    Westpac Low Rate Mastercard
    13.45% APR
    Up to 55 days on purchases
    $25 p.a.
    Westpac hotpoints Mastercard
    20.95% APR
    Up to 55 days on purchases
    $44 p.a.
    Westpac hotpoints Platinum Mastercard
    20.95% APR
    Up to 55 days on purchases
    $119 p.a.
    Westpac Airpoints Business Mastercard
    20.95% APR
    Up to 44 days on purchases
    $145 p.a.
    Westpac Airpoints Mastercard
    20.95% APR
    Up to 55 days on purchases
    $55 p.a.
    Westpac BusinessPlus Mastercard
    20.95% APR
    Up to 55 days on purchases
    $100 p.a.
    BNZ Advantage Visa Platinum Credit Card
    18.95% APR
    Up to 55 days on purchases
    $90 p.a.
    1 Fly Buys point for each $15 you spend or $1 in Cash Rewards for each $90
    ANZ Airpoints Visa Credit Card
    19.95% APR
    Up to 44 days on purchases
    $65 p.a.
    Westpac Airpoints Platinum Mastercard
    20.95% APR
    Up to 44 days on purchases
    $150 p.a.
    loading

    Compare up to 4 providers

    Data indicated here is updated regularly
    Name Product Purchase Rate Interest Free Period Annual Fee
    American Express Airpoints Card
    0% for 6 months (reverts to 19.95% APR)
    Up to 55 days on purchases
    $0 p.a.
    Be rewarded with 50 bonus Airpoints Dollars. Simply apply, be approved, and spend $750 on your new Card in the first 3 months of membership. This offer is available to new Card Members only.
    loading

    Compare up to 4 providers

    Applying for your first credit card

    Credit cards are a product for borrowers with a good credit history. If you’ve never applied for a credit product before, you have a better chance of being approved for a basic credit card than a credit card packed with extras. The credit card company will want to see copies of your latest payslips to verify your income as well as documents to verify your identity.

    While most institutions require you to apply for a credit card in your own name, some let you apply for a joint account with your partner. If you want to provide someone else with access to your account, you can nominate additional cardholders.

    Necessary documents

    • Income information. You need to provide copies of your most recent payslips to prove your income. If you’re self-employed, you can provide your tax return instead.
    • Identification. You need to verify your identity with the credit card company before your application is finalised. You can do this by providing your driver’s licence, passport, community services card or 18+ card.

    If you still have questions about how credit cards work after reading this guide, reach out to us using the form at the bottom of the page; a member of the finder.com/nz team will be in touch.

    Important tips to remember

    When getting a credit card for the first time, it can be easy to get carried away with spending ‘free money’. Before you apply, make sure you are making the right decision for your financial situation and keep these tips in mind:

    • There are many cards on the market, so make sure to research and compare your options. You don’t have to apply for a card from your bank, but it will make the application process slightly easier.
    • Even if you are tempted with various offers, stick with one card at first. It’s very easy for spending to get out of control if you have more than one card so make sure you master managing one first before you think about getting another.
    • Withdrawing cash from your credit card means that you’ll be charged interest straight away. Keep your card for online and in-store purchases as much as possible.
    • Check your statement carefully each month to make sure that you can account for every transaction. Even with tight online security and payment systems, credit card fraud is a possibility.
    • Before you get too excited about credit cards that offer rewards, make sure that you will actually get some benefit without drastically changing your spending or shopping habits. You may find that the reward does not justify a higher annual fee or interest rate.
    • If you can, pay off your balance each month. If you only make the minimum repayment, it can take years and hundreds (or thousands) of dollars in interest to clear your debt.
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