💳 Credit CardsHow credit cards work in New Zealand
A credit card lets you pay now and settle with the bank later. The difference from an EFTPOS or debit card is that the money is not taken straight from your account, but builds up on a credit balance that you pay off — in full or in part — when the statement arrives. Used well, a credit card is close to free and adds protection on purchases. Used badly, with the minimum payment and interest, it is one of the most expensive debts there is. Here we go through the mechanics.
Interest-free days
Many credit cards advertise up to 44 or 55 interest-free days. That is the maximum gap between a purchase made at the start of your statement cycle and the payment due date. If you pay the full closing balance by the due date every month, you pay no interest at all on purchases.
That is the whole point of using a credit card sensibly: you get a short, free line of credit and can keep your money in a savings account a few weeks longer. But it requires that you always pay the full closing balance, not the minimum payment shown on the statement. Cash advances and, on some cards, buy-now-pay-later style instalments are charged interest from day one, with no interest-free period.
Interest, the minimum payment and the annual fee
If you do not pay the full balance, interest starts to run — often around 20% a year on a standard card, sometimes more — and it compounds daily, so a balance that is only partly paid grows quickly. Low-rate cards charge a lower interest rate but often an annual fee; rewards cards charge a higher rate and a higher fee. The minimum payment is set low on purpose, to keep the debt going.
Many cards charge an annual fee, and rewards cards add a foreign transaction fee (often around 2-3%) on overseas and some online purchases. Weigh the fee against how much you would actually use the rewards, and set up an automatic payment for the full closing balance so you never revolve a balance by accident.
The benefits if you manage it
Many credit cards include travel insurance if you buy the trip on the card, extended warranty, purchase protection, or Airpoints and rewards. For online and overseas purchases a credit card also gives an extra layer of protection: if the retailer fails to deliver or goes out of business, you can request a chargeback through your bank.
Choose a card with no annual fee unless you are sure the rewards are worth it, and never carry a balance from month to month. If you already have card debt, paying it off is usually a better return than any saving or investing, because the interest rate is so high.
Frequently Asked Questions
- Does a credit card cost anything if I pay it off in full every month?
- If the card has no annual fee and you pay the full closing balance by the due date, you pay no interest on purchases. Cards with an annual fee still charge it. Rewards cards usually add a foreign transaction fee on overseas and some online spending.
- What is the difference between a credit card and EFTPOS or a debit card?
- With EFTPOS or a debit card the money comes straight out of your account. With a credit card the purchases build up on a credit balance you pay via statement later, with interest-free days if you pay in full on time.
- Does a credit card affect my credit score?
- Applying is a hard enquiry, and an approved card shows on your report as available credit with a repayment history. If you pay on time it helps your score over time. A missed payment shows in your 24-month history, and a default is a serious mark.
Informational content, not financial, tax or legal advice. Check amounts, limits and current rules directly with the official sources (Work and Income, the Reserve Bank of New Zealand, Inland Revenue, the Depositor Compensation Scheme) before making a decision.
