Understanding Some Credit Card Basics

Credit cards are often known as rolling credit. Store cards also fall into this category. The name comes from the fact that there is no fixed repayment date or schedule so the debt will keep 'rolling' indefinitely.



This is an important point to understand, because failure to recognise this could leave a borrower with a very big and very expensive loan!

For card holders who make the 'minimum monthly payment', there is only a tiny percentage of that money that actually goes towards repaying the debt. If you rely on the minimum monthly payment to be your debt repayment, it will take decades to clear even the smallest balance.

If you are looking for a credit card there are a few things to keep in mind. The type of card, or the company that will serve you best will depend on your purpose for the card, whether you are planning to clear the balance in full each month, transfer a balance or carry a monthly balance. Here are some terms to look for and what they mean.

Basic Terms

Interest Rates: This is the percentage of the balance that you are charged by the bank as the cost of the credit, it may also be called APR (annual percentage rate). For example if your APR is 10% and you have a balance of $1000 the interest you will pay will be $100 on an annual basis.

However, it is worth pointing out that interest rates are rarely as low as 10% on a credit card! Even in times of low inflation and interest rates, 15%-18% is more normal. Rates also differ for different types of transactions. For example, many cards will have a much higher annual interest rate for cash withdrawals made in a foreign country (plus transaction fees of course!).

Interest will begin to be charged either from the date of the transaction or from the statement date. If it is the later you can receive up to a month of free interest. Interest rates vary from under 5% to over 20% depending on your credit and how badly the bank wants your business.

It is worth pointing out that a credit card is usually the most expensive form of debt available to the average person (excluding things like loan sharks) which means that when choosing which loan to repay first, it is often wise to choose the card. It beggars belief just how many people want to repay the lowest interest rate lending first!

Balance transfers: This is transferring the balance of one card to another. A lot of banks offer an interest free period for transfers so it is possible to continuously transfer balances and avoid interest.

For cardholders with a good credit score, obtaining a new card to enable a transfer should be reasonably straightforward. This is an aspect of the credit card market that is quite competitive as companies fight each other for business with 'special' offers and deals.

Introductory rates: This is a lower rate for a period of time to entice customers to take a card with that bank. A bank may offer a rate of 4.9% for 6 months increasing to 14.9% after that for example. These can be good if you are need to borrow money on a short term basis.

Cash back: This is the opportunity to receive cash when you make a purchase, this obviously benefit’s the bank by encouraging you to borrow more money. Cash back is often charged at a higher rate and can be subject to different terms than a regular purchase. Check your contract to be sure.

Always understand the terms of your credit card agreement before using your card.

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