What is a credit card and how does it work?

What is a credit card?

A credit card is a payment card that allows you to spend with borrowed money. It is similar to a debit card in that you can make purchases in-store and online, but any money you spend has to be paid back.

When you use a credit card, banks and credit card providers give you a pre-set credit limit that determines how much you can spend. You need to make regular payments to continue spending and can be charged fees as part of your repayments unless you pay off your balance in full each month.

Credit cards all differ in their features, rates and fees. Some cards may offer benefits such as rewards points or travel perks and others may offer promotional interest rates to help you pay down credit card debt.

How does it work?

A credit card is an unsecured revolving line of credit: it's "unsecured" because no asset is required for you to be approved for your credit limit, and it's "revolving" because you can use the card on an ongoing basis.

When you're approved and start spending with your credit card, you will get a monthly statement that tells you the total amount you owe for that billing period. You can either repay the entire amount or a portion of it, with a minimum required payment that's usually around 2-5% of what you owe.

Your credit card will have a credit limit, which is the maximum amount you can spend. This is assigned by the credit card provider based on your perceived ability to make repayments.