How do credit cards work?

What is a credit card?

A credit card is a way to borrow money or get ‘credit’ from a bank. It’s a card with a set amount of funds (called a 'limit’) you can borrow at any time. This limit is set when you apply for a card.

Where accepted, you can use a credit card to buy things without cash and pay for purchases online or over the phone.

Like all debts, you need to repay the credit card. Credit cards have interest rates, which apply to amounts that you haven’t paid back, there’s a minimum monthly repayment, and most cards have an annual fee.

You should only apply for a credit card if you can afford the repayments.

Learn more about if a credit card is the right option for you, and how to get a credit card. 

Credit versus debit cards

A credit card allows you to borrow and spend money up to your approved credit limit. With a debit card, you’re spending your own money. A debit card is linked to your everyday transaction account, so you can only spend what’s in the account. If you’re worried about overspending, a debit card might be a better option for you.

You can also use the Spending tool in the NAB app to track where your money is going, and you can set a savings goal with My Goals.

Learn more about differences that set debit cards and credit cards apart.

How does a credit card work?

Your credit limit

Your credit limit is the amount you can borrow. When you apply for a credit card you can either set your own credit limit or the bank will set the maximum credit amount, based on the information you supplied about your financial situation. The bank will also set a minimum card limit, which depends on the type of card you apply for.

Interest rates

When you apply for a credit card you’ll be told which interest rate applies. This is an annual percentage that you pay, and it applies to any outstanding amount not paid off by the due date. The amount of interest you’ll pay will differ each month. It’s determined by how much you spend, how much you repay, and when you repay it. For example if the interest rate is 18% per annum, and you have $100 outstanding on your balance, you will be charged 18% per annum of $100, or approximately $1.50 per month.

Learn more about how credit card interest is calculated.

Interest-free periods

Most credit cards have ‘up-to-44 days’ or ‘up-to-55 days’ interest-free periods on purchases.  This means interest on amounts you owe doesn’t start to build up until the statement due date.

Interest-free periods usually start on the first day of your billing cycle, not when you make a purchase. For example, if your credit card has an interest free period of 44 days, this means you have 44 days from the date on your statement to pay the closing balance before incurring interest.

Note: Interest rates and interest-free periods don’t apply to a NAB StraightUp Card.

Repayments

Now you might be wondering how to pay off your credit card. Your bank will send you statements each month which will show you the total amount you have borrowed, any payments you have made, the interest rate, any interest or charges that have accrued, as well as the minimum amount you have to pay.

To avoid paying interest, make sure you pay the closing balance in full by the due date each month. If you don’t pay the full amount of the closing balance, you will need to pay at least the minimum payment amount shown on your statement. If this amount isn’t paid by the due date, you may have to pay late fees or missed payment fees, as well as interest.