The smart way to use a credit card

How do credit cards work?

When you sign up for a credit card, you get a limit for how much you can borrow. Word to the wise: set yours based on what you can afford to pay back, not on how much you think you might spend. A lower limit is often a smarter choice. You can usually request a lower limit from your bank or card provider – a boss move! 

Each month, you’ll receive a credit card statement showing what you owe. Pay the full amount by the due date and you won’t pay any interest. Pay less than the full amount and interest will kick in.

Remember: paying off your debt in full each month should always be your aim. Making only the minimum payment required won’t clear your debt quickly; it will end up taking ages and cost you heaps in interest. Spend a few seconds on our free debt calculator and budget planner tools to get a visual on how much you could save by being smart from the get-go, avoiding extra interest and working your repayments into your budget.

There are all kids of credit cards out there, from no-frills basics to premium rewards. The most suitable one for you depends on your individual circumstances.

Finding the best interest rate

Interest is the cost of money over time. With credit cards you'll be paying interest, and the longer you hold a balance, the more expensive things get. 

When it comes to saving and investing, the magic of compounding interest can work in your favour. When we’re talking credit cards, it compounds against you.  

Credit card interest rates can range from 13–29%, so it’s worth comparing before you commit. Don’t be dazzled by a low number, though, because those cards usually charge higher annual fees. Still, the lower the interest rate, the less you’ll be stung for if you don’t pay off your balance each month.

For a breakdown of interest rates, interest-free days and fees, check out the credit card comparison tool on interest.co.nz – an independent financial information service that tracks real-time rates and fees from major lenders.

“You don’t realise how much interest you’re paying. I had no clue until I used the tool showing how much our 10k credit card debt, repaid each week at a couple hundred, would end up being 40-odd-thousand dollars that we will pay back! Crazy!”

– shared with Sorted

Fees and interest-free days

Most credit cards charge an annual fee, and they can vary widely. Rewards cards often charge higher fees, so check whether perks like cash back and travel will actually be worth it for you. If you don’t pay your card off in full each month, the interest you pay may outweigh the value of the rewards.

You can take advantage of interest-free days (typically up to 55) if you pay your credit card balance in full at the end of each month. Miss a payment or start to rack up debt, though, and the interest will be charged from the day you made each purchase, not when your statement arrived. You’ll typically pay a late fee if you miss a payment, too. 

Can balance transfers help?

Can’t seem to get that balance down to zero? It might be worth looking into balance transfers. These are special offers to transfer the debt (balance) on your credit card to a new one with a different lender at a much lower interest rate (like 0% or low interest) for a set period (typically 6–12 months). It can be a way to reduce the interest you’re paying and pay off your debt more quickly. Get amongst our speedy debt calculator to see just how much faster that could be.

Before transferring:

• Suss out the transfer fee – usually 2–3% of your balance
• Check the details of the offer, as any new purchases might be charged at a different interest rate – it’s usually best to avoid using the card for new spending while you’re paying off the transferred balance
• Know what interest rate will kick in after the promotional period, and make sure you can clear the balance before then
• You’ll need to apply for a new card, which involves a credit check.

If you’re paying 20% interest and switch to a card with a 0% balance transfer offer for 12 months, you could save hundreds or even thousands in interest. However, always read the fine print and make a plan to pay off your card before the low rate ends. 

When taking up a balance transfer offer to ditch credit card debt, it’s best to cut up and cancel your old card to make sure you avoid running up debt again. It's too easy to end up with even more debt otherwise.

“[Sorted] taught me I could use a balance transfer to get significantly less interest and achieve a debt management goal I’d struggled with for four years.”

– shared with Sorted

Staying on top of repayments

It’s worth checking your bank’s automatic payment options to ensure you never accidentally miss a due date. Set up an automatic payment for the full amount (or as much as you can manage).

If you can’t pay in full, pay as much as you can above the minimum repayment. Here’s why it matters: paying only the minimum on a $3000 balance at 20% interest could take more than 10 years to clear and cost you more than $3000 in interest alone. Who wants that?! Use our free debt calculator tool to quickly crunch your own numbers.

“I got rid of credit card debt and use [my] emergency fund for the unexpected.”

– shared with Sorted 

Don’t struggle alone

If credit card debt’s getting on top of you, know it’s not just you and help is close to hand:

• Follow our 6 Steps. They walk you through how to get out of debt one money move at a time.
• Get a read on your budget. To free up money for debt repayment, you need to know where yours is going. Our budget planner lays it out for you.
• Talk to a financial mentor. At MoneyTalks, free, confidential money help is just a call (0800 345 123), text (4029) or email away.
• Talk to your bank or card provider. Ask them what options there might be, such as taking out a lower-interest loan to pay off credit card debt. Banks also have obligations under the Credit Contracts and Consumer Finance Act (CCCFA) to consider genuine hardship applications.

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