What is a credit card?
A credit card is a bank card that you either get together with your current account or can use
separately from the account. Regardless of whether the card comes with a current account or separately,
it's always a separate account linked to you credit card credted behind the scenes representing the credit
line granted to you. You can use it to withdraw money from ATMs, withdraw money by transferring it to your
current account or to pay at the checkout in a store or online.
To withdraw money at ATMs, you need the card's PIN; when paying at the checkout on a POS, you need
either the PIN or a signature. For smaller amounts, you can pay completely without a PIN or signature,
which is set by the issuing bank.
When you pay for an online order, you need the credit card number, the expiration date and the card
verification number (CVV/CSV). The card number and expiration date can usually be found on the front
of the card, the verification number on the back. However, many providers now also print the card number
on the back of the card or you can only find the data in the app. Only enter this data at shops that
you trust.
How do credit cards work?
A credit card allows you to make purchases by tapping into a credit limit granted to you by your
bank or broadly credit card provider that you can settle at a later date. At the end of every month
or another agreed period, you'll receive a bill statement that outlines your spending for the period.
Depending on the credit card type, you can pay off the entire outstanding balance usually at no additional
cost, or make the minimum monthly payment that's where the bank will start charging the interest rate on
the outstanding amount due.
Unlike a loan, which comes with a predetermined repayment schedule, repayment dates and a fixed end date,
credit cards offer maximum flexibility and are open-ended. That's why they're classified rather as a credit
line instead of a loan. With credit cards you have access to credit when you need it, and you can settle
your debt as quickly or slowly (reasonably) as you choose.
Large commercial banks such as Deutsche Bank, Commerzbank, etc. tend to be the first place people consider
for a credit card, but they're so many credit card options both from the licensed banks which operate online
and other financial institutions as well as the airlines, car companies, etc. bringing additional benefits
and rewards for consideration.
What are the types of credit cards available?
In Germany there are hundreds of credit cards of different sorts and flavors available
with different terms and conditions and a wide range of additional services. On a high level, credit cards
primarily differ in terms of which card network they operate on and how the outstanding amount is paid:
- Revolving Credit Card: is the true credit card in all respects. It provides you with a classic credit
limit, billing cycles, an option for full or partial repayment, installment purchases, interest rates whenever
you decide to borrow funds beyond the interest-free period, maximum acceptance and flexibility worldwide.
That's where you enjoy borrowed funds to the fullest.
- Charge Credit Card: A charge card is mostly similar to a reveloving credit card in all its features,
however the option of minimum monthly repayment is not available. Instead, an invoice is issued every month
at the end of the billing cycle, which you have to pay in full. This means that no interest is ever charged
on the credit with the charge card, however you lose a flexibility of borrowing money for longer when needed,
as well as usually those cards don't have an installment payment option.
- Prepaid Credit Card: A prepaid credit card just looks like a credit card, however it can only be used
when the cardholder tops up the card with their own money. That means you use this card as if it's a regular debit
card using your own funds. The only difference from a debit card is that it's usually not connected to your current
account and uses a separate account that needs to be topped up to be able to pay. This provide some convenience
and a sense of security by being able to spend from a separate pocket only. A loan cannot be taken out
with the prepaid card. However, most prepaid credit cards are very easy to get as they're available without
a Schufa or any other checks. This type of credit card is therefore particularly suitable for anyone who
wants or needs to keep an eye on their finances and does not want to exceed a set budget. Other than that the card
appears to be a credit card for merchants that require a credit, not debit card to be presented, such as car rentals
and hotels, especally when travelling to places where credit cards are very common, such as the United States.
- Debit card: The debit card is usually issued in conjunction with a Girokonto or with some providers
with another form of a current account, from which the respective amount is debited shortly after payment,
just as with a Girocard (formerly EC card). The debit card does not offer its own credit limit, however given
that they're connected to you regular current accounts you can go into an arranged overdraft on your current
account which means you start borrowing money with a debit card on your current account. An overdraft means
that you start accruing interest on a daily basis immediately, although many banks provide very reasonable interest rates.
This option can be suitable if you borrow for a few days and pay a small interest rate as a result for
convenience. For longer borrowing periods or for larger purchases it's advisable to consider a credit card
for better financial efficiency.
How can I chose the right credit card for me?
Just like with any new product you want to buy or start using it's advisable to do a research first.
With over a thousand credit cards available in Germany, it is difficult to get an overview of all the possible
combinations of services and fees by considering each and every offfer separately. Supafinance helps you
find the credit card with the right billing model, the best combination of services and fees, rewards and
cashback, insurances and other perks.
What are the advantages of using a credit card?
- Interest-free and flexible small loan: Revolving and charge credit cards provide cardholders with a
short-term loan that can be used flexibly. No interest is charged on the loan until it is the end of the
interest-free period when it's time to settle the debt in one way or another. Since the loan taken out on
a charge card is repaid in full at the end of the payment period, holders do not pay any interest.
The card is usually settled every 30 days, however some card providers offer longer interest-free periods.
With revolving cards with a partial payment function, users can pay off the loan in installments beyond the
payment period. However, depending on the offer, relatively high interest rates are charged in here.
- Worldwide acceptance: Credit cards are particularly popular with people who travel abroad frequently
for business or pleasure. Credit cards have the great advantage that they have the maximum acceptance.
Visa and Mastercard have the most acceptance points and ATMs worldwide. Credit cards are also great for
car rentals and hotel deposits - given the nature of such temporary deposits - you never have to reserve
some extra personal cash for the deposit purpose.
- Free cash withdrawals and payments abroad: The cards not only score points with their high level of
acceptance worldwide - some card providers waive all fees for cash withdrawals and card payments locally
and/or abroad which makes them an ultimate form of payments.
- Contactless payment via NFC: With most credit cards, you can make contactless payments using the
NFC chip built into the card. You can also load a credit card into your Apple Pay or Google Pay wallets
on your smartphone which makes both in person and online payments more convenient and secure.
- Additional services: A credit card also differs from other payment methods in the additional services
it offers. Travel and car insurance, bonus systems, discounts and various other extras usually come only
with a credit card. It should be noted that most credit cards with additional services are also credit
cards with a higher annual fee. In order for the fee to be worthwhile, the holder must make full use of
the services.
- Emergency fund: Another advantage for anyone who likes to go on a vacation abroad: If you get into
an emergency situation, for example because you have to go to hospital or have had an accident, you can
quickly withdraw money, even if your checking account is already maxed out or Girocards are not accepted.
In many countries, the cost of medical treatment can quickly become very high. That's why you should pack
a credit card, even if you're on a supposedly prepaid package holiday.
The costs of credit cards
One of the downsides of credit cards is that the fee structure can be a bit complex. But do your homework
and use them correctly, and credit cards can be the cheapest form of borrowing going (or can even earn
you benefits while not costing you a penny).
The following credit card fees apply depending on the offer:
- Annual/monthly maintenance fee. Many cards in Germany don't come with an account fee attached,
but more premium options (generally including rewards and insurance packages) can do.
The credit card annual fee is deducted from your available credit and accrues interest at the purchase
rate if it isn't paid at the end of the statement period just like any other purchases you make using the
credit card.
- Monthly repayments. In most cases you're free to repay as much as you like as often as you like,
subject to a minimum payment that'll be outlined when your statement is issued - usually about 10-20% of
your outstanding balance. You'll pay a late payment fee (and damage your credit score) if you don't make
the minimum repayment by the statement due date. If you clear your full balance each month, your purchases
generally won't incur any interest - it's when you carry a balance from month to month that the interest
kicks in.
- Interest rates. Interest is the price you pay to borrow money, but confusingly with credit cards,
different parts of your balance can incur different interest rates. Most commonly, cash advances (withdrawing
cash using the card) may incur an interest rate without interest free period that applies to regular payments.
- Cash advance fees. Withdrawing cash on a credit card sometimes is a bad idea. Many cards have a one-off
fee and/or an immediate interest to be charged. These extra fees can also apply to “cash-like” transactions -
for example any spending at a casino, or buying foreign currency.
- Currency conversion fees. Any spending in currencies other than Euro will usually involve a
currency conversion fee.
- Other fees. There are a few other fees that issuers can charge - for example, additional card fees
(when you request an additional card for a partner or family member), money transfer fees (when you transfer
money from your card to your current account) or fees for misuse, like going over your credit limit or
failing to make a repayment by the scheduled date.
MUST READ: Interest free period
Almost all credit cards come with 30-90 interest-free days each billing period. To take advantage of this
facility though, you'll need to clear your balance in full each month. It's only applicable on new
purchases and, in most cases, not available on cash advances or money transfers.
Here's how it works: Let's say you make a 100 EUR purchase on the first day of the month, then at the end
of the month you're sent a bill and asked to pay by the 25th of the next month. Provided you clear your
full balance, you could have enjoyed 55 or 56 days of interest-free credit on that purchase. However,
if you only pay the minimum required payment, you'll be charged interest on the purchase from the day you
made it.
If you set up a direct debit to clear your full balance each month (yep, this is possible - and very normal)
then you can relax in the knowledge that you should avoid interest altogether. Just make sure you have
the necessary funds in your nominated current account to cover the direct debit. The alternative to direct debit,
although a less convinient option, would be manually transferring the full repayment from your current account
to the credit card balance.
What do I need to know before I apply?
Once you've established what type of card you need, you can use Supafinance comparison tool to see the
cards available and filter the list by applying various filters narrowing down the selection of cards that
suits you.
The representative interest rate can be a helpful figure to use when comparing cards from different issuers -
it's a standardised figure that's designed to illustrate the annual cost of using a card.
When you apply for a credit card, the banks look at your finances. They are primarily interested in your
credit rating, i.e. how well you are doing financially. They usually check this using the data that credit
agencies such as Schufa have stored about you. Whether money is regularly deposited into your account can
also play a role. This is how they want to ensure that you can pay off your credit card debts.
In many cases, age also plays a role. Banks usually only issue credit cards to adult customers.
This is because minors are not allowed to get into debt.
However, if you are a minor or have problems with your credit rating, you should not despair if you need a
card for online shopping or a holiday abroad. The banks also have cards in their range that are aimed at
minors or people with poor credit ratings: prepaid and debit.
How do I apply for a credit card?
Applying for a credit card is easy: you fill out the application form; in most
cases, this can now be done online. Then you send the documents to the bank and
prove your identity, either via Post-Ident or Video-Ident. With some providers,
you will only receive the credit card if you open a current account with the
bank at the same time, so be mindful of that - you might consider the options
without opening an additional current account and use your existing one for
settling debt.
The information you must disclose includes:
- Name, place of birth, date of birth
- Address, rent including heating, how long you live there, whether you rent or own your own property
- Occupation, industry, how long you have been employed
- Net income and other income
- Nationality
- Marital status, number of dependent children
Exactly which data is required depends on the provider. With a real (revolving) credit card, more information may
be requested, as this will ultimately also include your financial situation.
The bank will also tell you that it will pass on data to Schufa and will also obtain information from the
credit agency. Some providers may not require this step, especially young companies or prepaid cards.
You won't receive your credit card straight away. It usually takes two or three weeks until you have the
card and PIN together. If the card is linked to a checking account, you will also receive the Girocard
and PIN for the account separately.
In most cases, you now also need an app to use your credit card. This is how the security process for online
shopping works. You can often also use it to view your transactions or receive push notifications.
Important note: A bank can cancel your credit card. For example, because it is discontinuing the product
or because you no longer meet the customer criteria. They do not have to give you reasons for doing so.
How can I make the most out of my credit card?
Making the best out of your credit card is a fine art: it's all about using it often, but not too much,
and in the right way. Here are some of our top tips:
- Pay off your monthly bill in full. The best way to use your credit card is clearing your balance in
full every month, so that the card doesn't start accruing any interest.
- If you can't pay in full, try to at least meet the minimum payment. Paying the minimum repayment
amount allows you to avoid late repayment fees and also helps you preserve your credit score.
- Don't withdraw cash on your card if it has one-off fees or incurs interest. Many credit cards charge
an extra fee for cash advances, so it's better to just get cash with your debit card if you can.
- Set up a direct debit for repayments. We're all busy people and forgetting to pay a bill on time
is an easy mistake but has very concrete consequences, in the form of interest you'll have to pay back.
- Don't use all your credit. One of the many factors that can impact your credit score is the so-called
utilisation rate, which is based on how much credit you use compared to how much you have available.
You should keep your utilisation rate as low as possible, 30% should work just fine.
- Pay off your most expensive debts first. Let's say you have more than one card, you're having a rough
month and have to choose which of the 2 bills to pay. In this case, check which card charges the most and
clear the balance on it first.
- Choose a card which earns you more than it costs. If you're choosing a rewards card with an annual fee,
check that the rewards you'll earn with the card will outweigh the cost of the fee.
- Put regular expenses on a credit card to earn rewards. If you get a rewards credit card,
you should use it as often as you can, especially if you're paying an annual fee. An easy way to do this
is to use your credit card for regular expenses, such as your grocery shopping, rental cars, booking hotels etc.
- Don't overspend just to earn reward points. Don't fall into the trap. If you realise you're not using
your rewards card as much as you expected to and the annual fee isn't worth it anymore, don't compensate by
making random purchases.
- If you've accumulated debt, consider installment payments or loan restruture. Installment payments can
buy you some time to pay off your debt and the best ones come with 0% on balance transfers for few months.
- It's okay to keep a card you don't use, unless it has a fee. Not using a credit card isn't a problem
in itself. You'll have more credit available, so it'll lower your utilisation rate and potentially help your
credit score.
Visa, Mastercard or American Express?
It's not just your bank that's behind credit cards, but also credit card companies like Mastercard or Visa .
They provide the infrastructure for payment transactions and set rules of conduct for banks and retailers.
They generally have nothing to do with credit card users. If you have any problems with the card, you always
have to contact your bank. The card-issuing bank sets the fees for the card, not the credit card company.
For consumers, there is little difference between Mastercard and Visa , both are widely accepted worldwide.
Usually Mastercard is accepted whenever Visa is and vice versa since the same devices or online card processors
are usually configured to accept both. However, there may be a preference for one of the brands in individual
countries. If you travel abroad a lot, find out about it beforehand.
The situation is slightly different with companies like American Express (Amex) which is getting popularity
in Germany thanks to their partnerships and bonus points based reward programs. Amex sets the prices themselve
and is your contact if you have any problems. Important for you: many businesses than do accept Mastercard and
Visa don't accept American Express. This is partly because they are often more expensive for retailers. Also,
when used for travelling Amex cards are generally more expensive for you as they charge some hefty fees for
currency conversions and cash withdrawals as compared to Visa and Mastercard issued cards. For local usage
they're still a good option with their nice reward programs.
