Read the basic facts and FAQs on credit cards below.


What is a Credit Card?

Can you imagine a world without credit cards? Credit cards have been in use since the first card surfaced in the USA in the 1920s and now the world relies heavily on this type of payment.

The credit card comes in the form of a small plastic card which holds details unique to each card and its holder. This includes a special card number, signature strip, personal PIN number and other embedded data which means the card can only be used by its designated holder.

The card can be used to make payments on the internet, in shops, retailers, restaurants and to withdraw cash from ATM machines.

How does a Credit Card work?

A credit card is a form of credit, meaning that it allows you to spend now and pay later. At the point of purchase (in other words, when you are buying something using the card) you do not actually hand over any money, nor is money removed from a bank account. The sale is recorded and you the cardholder are given a bill for all purchases made, as well as any fees each month by the card company.

The cardholder then pays either the full outstanding balance or a minimum portion of the debt by a certain due date. The card issuer sets a rate of interest on the amount owed each month. If a minimum payment is not made within the set due date, the card issuer may impose a fee (often known as a 'late fee').

In essence, a credit card allows you to borrow money from the card issuer which you will pay back later. You can only borrow or spend as much as is set by your credit limit that is the maximum amount of spending power you have using the card (for instance, $15,000). The credit limit is set according to your personal circumstances and is decided when you apply for the card. The better your credit record, the higher the credit limit you are likely to receive.

Credit cards come within the category 'revolving credit' that means an ongoing credit agreement between the cardholder and the card provider where the outstanding balance does not have to be paid in its entirety each month. A minimum payment will be required.

Types of Credit Cards

There are many types of credit cards, as well as other similar payment cards which are not technically credit cards. Types of credit cards include:

  • Standard credit cards
  • Business credit cards
  • Student credit cards
  • Reward credit cards

Cards similar to credit cards:

  • Debit cards
  • Prepaid cards
  • Charge cards

All three of these cards are not credit cards, and work in different ways.

Debit cards provide a link between the cardholder and their bank account. When a payment is made, the bank will withdraw funds from the cardholder's account and this will be transferred into the account of the payee.

Prepaid cards do not hold a credit or borrowing facility and work purely on a 'pay as you go' basis funds are loaded on to the card by the cardholder. See more in our Prepaid Cards section in the Information Library.

Charge cards do not fall into the category of revolving credit, as the balance must be paid in full by each due date (every month) and there is often no credit limit or a very high credit limit. They are aimed at people with high incomes and who can afford to pay off large amounts in full each month if they cannot, hefty fees are imposed.

Credit Cards the Risks

A credit card is a highly useful and universal way to pay, but it does come with its risks. While it is relatively easy to get a credit card, you should approach getting one the same way you would approach taking a loan.

  • You will have to take interest rates, regular payments and possible fees into account
  • It can be easy to spend more than you can afford
  • Many cards come with attractive introductory offers, but what happens when they end?
  • Have you read all the small print when making the application?

If you are unsure of your suitability for a standard credit card, perhaps consider other forms of payment cards including debit cards and prepaid cards, which do not carry as high a debt risk.


Please note that Which Way To Pay New Zealand ( is not authorized to give personal financial advice under New Zealand's financial services regulations, including the Financial Advisers Act (Securities Commission New Zealand).

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