When considering a credit card, like most financial products, it can often become overwhelming with so many to choose from and some even offering various perks and benefits.

We've broken down the three key types of credit cards and how to determine which is best for you depending on your spending needs and repayment habits.

Types of credit cards

There are a number of different types of credit cards which offer various benefits depending on the way you spend and what you want to use the credit card for. Three of the most commonly used types of credit cards include:

  • Low interest rate cards, a basic credit card with no frills or special features. It's a great option for those who are unable to pay the full balance each month and want to keep the interest paid on purchases as low as possible.
  • Low fee cards, like low interest rate cards, are a basic card better suited to those who can confidently pay off their balance each month. This type of card is ideal for someone who may want a convenient every-day credit card to have on hand with no access to special features or rewards. Low fee cards generally have a higher interest rate than a low interest rate card and may not be suitable if you only make the minimum repayment as this will prolong your debt and the amount of interest you end up paying.
  • Rewards cards, a card designed to reward you based on how much you spend. Generally, each dollar you spend will earn you points that can be redeemed for flights, entertainment, vouchers etc. This type of card usually has higher interest rates and fees and is typically better for someone who is able to pay more than the minimum required payments. It's important not be lured by reward programs if the credit card is not suited to your needs – you could end up paying more in fees and interest than the rewards are actually worth.

Understanding interest

Interest is essentially the fee you're charged for borrowing money. When you make payments on the amount you owe, you end up paying more than what you've borrowed due to the added interest.

As a general rule of thumb, the best way to manage your credit card is to pay off your balance before the interest-free period ends as calculating interest on late payments can sometimes get confusing.

Types of credit card interest

Whether you're searching for a credit card or already use one regularly, you might have come across different types of interest rates that may apply.

  • Purchase rate: The interest rate you are charged for making regular purchases in store and online.
  • Cash Advance Rate: This rate of interest is applied to transactions such as withdrawing cash from an ATM or buying gift cards.
  • Balance Transfer Rate: This rate of interest charged when transferring existing credit card debt to a new card. A word of caution – many credit card providers will often use low balance transfer rates to lure customers to switch to them. Be sure to understand what the interest rate will revert to after the balance transfer period has finished.
  • Introductory or Promotional Interest Rate: These are short term offers on credit cards that provide limited time lower interest rates when you sign up to them, such as 0% for 12 months. Many credit cards come with an interest-free period, meaning you won't be charged any interest on purchases you make during that period.

While there are a number of things you need to consider before choosing a credit card, the key things you need to look out for are the interest rates, fees and any features that may benefit your intended use for the card. Above all else, ensure you're capable of making the repayments as debt can quickly spiral.

Learn more about Auswide bank's range of credit cards

Auswide Bank Ltd Australian Credit License 239686 is the credit issuer. This is not an offer to lend – approval is subject to credit assessment criteria. Terms, conditions, fees and charges apply – full details on application. This information provides general advice only. We do not provide advice about this product based on any consideration of your personal objectives, needs or circumstances.

Published: Wednesday, 11 May 2022