How credit cards work

What is a credit card?

A credit card can be a handy way to pay for things, build a good credit history and earn rewards, but if you don’t handle it correctly it could be a plastic gateway to debt. To get the most out of a credit card you need to understand how it works, the fees and interest involved and the best way to manage payments.

When you use a credit card, you’re effectively borrowing money to make a purchase or transaction. The official term for a credit card is ‘revolving line of credit’.

It’s different from a debit card, like an EFTPOS or Visa Debit Card, where you use your own money when you buy something or withdraw money from an ATM and that money is withdrawn directly from your bank account.

Your credit limit

All credit cards have a credit limit - this is the maximum amount you can spend on your card. It will depend on things like your income, credit score and general financial health. As well as a maximum limit, the card you apply for could also have a minimum credit limit, which will be set by the bank.

Interest rates

The amount of interest you’ll be charged on your credit card account will vary from card to card. It’s also different for purchases versus money you take out of an ATM (which is called a cash advance).

When you make a payment to your credit card, that money is applied in a certain order, depending on the type of transactions you've made. See more information about the order of payments on your credit card.

Interest-free periods

You can avoid paying interest charges on purchases by paying your credit card balance in full each month. However, if you make a cash advance, by taking money out of an ATM for example, interest will be charged as soon as you make the transaction.

Most cards have ‘up to 44 days’ or ‘up to 55 days’ interest-free periods on purchases (but not cash advances). If you pay your credit card off within this time, you won’t pay any interest on your purchases.

For example, if your credit card has an interest-free period of up to 44 days, this means you have 44 days from the first day of your statement period to pay off the full balance shown on that statement. After this, you’ll be charged interest.

These interest-free periods start on the first day of your statement period, not when you make a purchase. You can find the dates of your statement period at the top of your statement.

You won’t receive interest-free days on purchases if you have a balance transfer.

Minimum repayments

If you’re not able to pay the full amount of your credit card statement by the due date, you’ll need to pay at least the minimum payment due.

At Kiwibank, that’ll be either 5% of your outstanding balance as at the date of your statement, or $10, whichever is higher. Some other banks’ minimum repayments are calculated at less than 5% of your monthly balance – so if you switch to us from another bank you might find your monthly minimum payments are higher. We set the minimum higher because we want you to pay off your balance sooner, reducing the amount of interest you'll pay.

If you don’t pay the minimum amount by the due date, you may have to pay a fee as well as interest. It’s worth trying to pay more if you can, because if you stick to the minimum you’ll end up paying a lot more in interest.

Fees

Interest charges are not the only costs associated with credit cards, there are also fees attached.

Most credit cards charge an account fee - at Kiwibank we charge this fee every six months.

Other fees you could be charged include: a late payment fee if you miss a payment, a joint or additional cardholder fee if you have more than one card linked to your credit card account, a cash advance fee if you withdraw money from an ATM, an international transaction fee if you use your card for a foreign currency transaction. See more about credit card fees.

Contactless payments

For payments of less than $200 in New Zealand you can tap your credit card and complete a purchase in seconds. For transactions worth more than $200 you’ll need a PIN or signature.