How Credit Cards Work: Complete Guide
Key Takeaways:
- Learn how credit card interest is calculated
- Understand billing cycles and payment due dates
- Compare credit cards vs debit cards
- Discover credit card benefits and rewards
What is a Credit Card?
A credit card is a payment card that allows you to borrow money from a financial institution to make purchases. Unlike debit cards that draw from your bank account, credit cards provide a line of credit that must be repaid.
How Credit Card Interest Works
Credit card interest is typically calculated daily and charged monthly. Here's how it works:
- Daily interest rate = Annual interest rate ÷ 365
- Interest is charged on unpaid balances after the interest-free period
- Most NZ credit cards offer 44-55 days interest-free on purchases
Example Interest Calculation
On a $1,000 balance with 20.95% p.a.:
- Daily rate = 20.95% ÷ 365 = 0.0574%
- Daily interest = $1,000 × 0.0574% = $0.57
- Monthly interest (30 days) = $0.57 × 30 = $17.10
Credit Card vs Debit Card: Key Differences
Credit Cards
- Borrow money to spend
- Interest charges apply
- Rewards programs
- Better fraud protection
Debit Cards
- Spend your own money
- No interest charges
- Limited rewards
- Basic fraud protection
Credit Card Billing Cycles
Understanding your billing cycle is crucial for managing your credit card:
- Statement date: When your billing cycle ends
- Due date: When payment must be made
- Interest-free period: Usually 44-55 days for purchases
Are Credit Cards Worth It?
Credit cards can be valuable financial tools when used responsibly. Benefits include:
- Rewards points and cashback
- Travel insurance and purchase protection
- Interest-free periods
- Build credit history
- Emergency funds access
Tips for Responsible Credit Card Use
- Pay full balance during interest-free period
- Stay within 30% of credit limit
- Monitor statements regularly
- Choose cards matching spending patterns
- Understand all fees and charges