The humble credit card can be a double-edged sword - a useful financial tool, if used wisely, but a total pain if not. Understanding how they actually work - from cash advances, to interest-free days, to how interest is calculated - can help you make the most of your card.

A revolving line of credit

Credit cards are what bankers call a "revolving line of credit". In simple terms, this means you can continually re-use the credit on your card up to a predetermined credit limit.

This means that, unlike a personal loan, you don't have to re-apply for funding each time you make a purchase.

Get familiar with your card's interest-free period

One of the downsides of credit cards is that they can come with high rates of interest – rates that can even exceed those of home loan rates! But, if you’re smart about it, it's possible to avoid those interest costs altogether.

Here’s how to pull it off: most cards come with an interest-free period, usually somewhere around 44 to 55 days. If you can pay off your card purchases within the interest-free period, it can be virtually cost-free, with annual fees being the only expense you may have to grapple with.

Minimising interest charges

As we explained, your credit card is a revolving line of credit. What this means is that your card lets you carry an ongoing balance from one month to the next. You’ll pay interest on the debt, but it will also come with opportunities to minimise the cost.

Each monthly card statement will show the minimum repayment due that month. Usually, this will be set at 1.5% to 2.5% of the card balance.

If you stick to the minimum payment, it will not only extend the time taken to clear the debt but also inflate your long-term interest bill - and, in turn, the cost of purchases made with the card.

So, it's very much in your interest (pun intended) to pay more than the monthly minimum. There's no charge to pay extra, and every additional dollar helps to whittle away the card balance and let you save on interest.

Your monthly card statement shows how much you will pay in interest, and how long it will take to clear the slate if you stick to the minimum repayments. It's worth checking out as it can be quite an eye-opener to see how interest charges can increase over time - and keeping on top of those increases can save you a headache in the future.

Cash advances

Not all of life’s surprises are good, and you might find yourself in an unexpected situation where you’ll need some extra cash. When things go sideways, your credit card can be your financial lifeline through a cash advance. But be warned - this is a feature that should be used sparingly, and not one that should be taken lightly.

As a rule, cash advances do not come with interest-free days. The interest meter will start ticking from day one, so it's important to pay off the advance as soon as you can - and be careful to only withdraw what you can realistically afford to repay.

Choose the right card for you

Ultimately, the key to making the most of the features and flexibility of credit cards is to use them sensibly and know which type of card is right for you.

If you're the type that’s likely to remember to pay off your card in full before interest charges apply, a card with a low annual fee can be a good shout. However, if you see yourself as more likely to carry an ongoing debt, opting for a low-rate card can help you keep a lid on interest costs.