Introduction to credit cards

Find everything you need to know about using your credit card with this helpful article where we look at:

• What is a credit card?
• What can you use a credit card for?
• How do credit cards work?
• How do credit card charges work?
• Should I choose a credit card?
• How to apply for a credit card
• Helpful credit card guides
• Frequently asked questions

A credit card allows you to make purchases in shops and online. You can use it like a debit card, but there’s one crucial difference: the money isn’t yours, it’s been borrowed from your credit card provider, so you need to pay it back, often with added interest.

Your credit card provider typically sets a limit on how much you can spend – or borrow – in total, which is known as the credit limit. They will also have strict rules on repayments and how much you need to repay each month, which can be affected by things like:

• Your credit score
• Other credit you have taken out
• How much you spend each month
• The APR rate on the card 
• Your outstanding balance on the credit card

What can you use a credit card for?

A credit card is a flexible way to pay for a whole number of things. Here are just some of the ways you can use one.

Big purchases

If you’re buying something expensive, such as furniture, appliances or a holiday, a credit card is one way to pay for an up front purchase over a longer period of time. Some cards have a 0% interest period, which may also mean you don’t pay interest on eligible purchases if you pay off the balance in the agreed time period, if not additional charges will occur.

Online payments

Credit cards offer a layer of protection that debit cards don’t provide online for goods and services purchased greater than £100 and up to £30,000, courtesy of Section 75 of the Consumer Credit Act. For example, if goods or services ordered online are faulty or didn’t arrive at all you may be able to get your money back using the Section 75 legislation.  

Transferring a balance

Most credit cards allow what is known as a Balance Transfer, whereby you can transfer an outstanding balance from one credit card to another. This may help you to organise your existing debts or reduce the cost of your borrowing overall if you select a product with lower rates or charges. Some credit cards offer 0% interest  periods, which can help avoid additional costs of doing this, although some may also charge a fee - often a percentage of the balance you’ve transferred – which is then added to your outstanding balance.

Money Transfers

Many credit cards will allow you to transfer money from your credit card as funds directly into your bank account, in what is known as a Money Transfer. It is common for lenders to offer 0% interest periods on Money Transfers, which could make it a cost-effective way of paying for things if you use your current account. However, it’s common for lenders to charge a fee – often a percentage of the amount transferred into your bank account – which is then added to your outstanding balance, so you should consider any costs carefully before doing so.

Spending abroad

Credit cards can be used while you’re out of the country and not just domestically. Though you may have to pay a foreign exchange fee on purchases, they can be a more secure way to pay, as you may not need to carry cash or travellers cheques. Some cards may also offer purchase protection, in case of theft, loss or damage to items you buy abroad.

We’ve got more detail in our guide on using a credit card abroad.

How do credit cards work?

A credit card works by letting you spend money that you borrow from your credit card provider, up to a pre-agreed limit. A monthly statement will be sent to you that lists the amount you’ve spent alongside any fees or charges.

You’ll then have a minimum amount that you must pay back each month, which is decided by your card provider.
 
It’s vital to keep on top of these payments and to aim to pay off your full balance each month. If you aren’t able to do that, try to pay more than your minimum payment, but failing that, it’s essential that you repay at least your minimum amount, otherwise you may face additional interest, fees or charges.  Failure to make minimum payments on time can also impact your credit score.

How do credit card charges work?

There are different ways you may be charged while using your credit card. Here are some of the main charges you may come across with a credit card:

• Interest – if you don’t pay your credit card balance in full after each statement, you’ll be charged interest on the remaining amount. It’s important to check the terms and conditions of your credit card to make sure you can afford the repayments.
• Late payments – you may be charged for missing payments and promotional offers – such as an introductory 0% interest period - could be withdrawn as a result. This could stay on your credit record, which could mean lenders might be hesitant to lend to you in the future.
• Overlimit transactions – you may be charged if your balance exceeds your credit limit, so it’s important to spend within your agreed credit limit, although some lenders do offer some grace.
• Cash withdrawals – if you withdraw cash with a credit card, you may be charged. This could be a percentage of the amount you withdraw, or a set amount that is pre-determined. Some lenders will also restrict how much of your credit limit can be withdrawn in cash.
• Annual or monthly fees – selected cards will charge you a regular fee to use it, such as monthly or annually. This fee may be charged as soon as you open the account, then charged again on the same date for every year you hold the card.

Should I choose a credit card?

There are a few pros and cons to consider before you decide whether a credit card is the right option for you.

Advantages of credit cards

• Payments are protected – with most providers, payments on your credit card greater than £100 and up to £30,000 are protected, thanks to the Consumer Credit Act. For example, if you bought a tv online using your credit card but this never arrived you’d be entitled to claim your money back.
• Easy to use – a credit card is just like a debit card; a small, conveniently shaped piece of plastic that you can easily carry around in a wallet or purse. You may also be able to add your credit card to your digital wallet.
• Safer than cash – if you were to lose your credit card, you can call up your provider and cancel it. You may even be able to get some of the money back if it was stolen and used.
• Rewards – with some credit cards, you can benefit from rewards, such as points to be redeemed in stores and online.

Disadvantages of credit cards

• Interest – you will have to pay interest, depending on your credit card provider, if you don’t pay off your outstanding balance in full each month. This can really add up and could cost you more than other methods of borrowing money.
• Expensive to withdraw cash – it can cost more to withdraw cash from an ATM using your credit card, compared to withdrawing using a debit card. Depending on the credit card you have, you may be charged interest or fees by your lender when you withdraw money – this is alongside possible charges from the ATM itself.
• Can be costly to use abroad – some credit cards, such as travel credit cards, are designed for use overseas, as they may not charge foreign transaction fees. If you don’t have a travel credit card, you may be charged fees when using it abroad.

If you’ve decided that a credit card is the right option for you, it’s simple to apply for one.

1. Check your eligibility – before you start your application, use a credit card eligibility checker to see what the likelihood is of you being accepted. It’s a soft check, so this won’t appear on your credit record.
2. Start your application – if you’re happy to proceed, find the card that you would like to apply for and start your application.
3. Fill in your details – when you apply, lenders may ask for your:

• Personal details
• Home address and address history
• Income
• Employment details

4. Get your decision – your lender will then assess your application by running a hard credit check on you. This check will appear on your credit history.   

Want to learn more about using a credit card? Head across to our support and FAQs page.