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What is a credit card?

A credit card is one way you can borrow money to pay for goods and services. They can be helpful if you want to defer payment or spread the cost of an expensive purchase, for example.

The credit card company will provide you with a credit limit, which is the maximum amount you can spend on the card. You will then need to repay the card balance at a later date.

You have to make at least the minimum payments required and, depending on the type of card, you may need to pay interest.

How do credit cards work?

When you spend with a credit card, the card provider is effectively lending you the money to pay for the goods or services, which you will then repay later. You have a credit limit, which is the maximum amount you can spend on the card.

A basic credit card transaction works like this:

• You use your card to spend online or in-person, just like any other type of payment card.
• As long as the transaction is approved, the credit card company sends the money over.
• You now need to pay the credit company for this amount, plus any interest. The amount you owe will be detailed on your credit card statement.
• With most cards, you need to make at least the minimum repayment each month. This will be at least 1% of your outstanding credit card balance plus other charges, but providers may set it at a higher percentage.

Unless you pay off your balance every month or have an interest-free period with your card, the provider will charge you interest on your credit card. The rate of interest will vary between individuals and will depend on your credit history, among other factors.

Credit cards may come with other fees and charges – if you use the card to withdraw cash, for example.

» MORE: How do credit cards work?

Types of credit card

There are a number of different credit cards available, each with their own features and benefits. Some of the main types include:

0% purchase card

0% purchase credit cards are interest-free for a set period, which can be useful if you want to pay for a high-cost item. If you repay the balance before the 0% interest period ends, you won’t pay any interest. However, interest charges will apply after this period expires.

Balance transfer credit card

You can move the amount of debt left outstanding on an existing credit card to a balance transfer card to save money on interest. You will be charged a fee to do this, but balance transfer cards typically come with a 0% interest period. As long as you pay off the balance before this period ends, you won’t pay any interest. You may not be able to transfer balances between cards from the same provider.

Money transfer card

This kind of card allows you to transfer cash into your bank account, for a fee. Bear in mind that providers may not allow you to use your card to repay any other types of credit you may have taken out with them.

Rewards credit card

Some credit cards come with different reward schemes, which can offer certain perks when you spend with the card. For example, with a rewards credit card, you may earn points which you can then redeem at supermarkets, high street shops, leisure and entertainment providers, airlines, and more. The rewards available will vary between credit cards.

Cashback credit card

With a cashback card, you can earn cash when you spend. Providers will set their own rules, as some may only offer cashback when you spend on certain items or over a specific amount. With these cards, it’s important to not spend more than you would normally just to get the cashback reward, as this would cancel out any benefits the cashback may bring.

Credit builder card

Credit builder cards can help those with a poor or limited credit history who may struggle to access a standard credit card. They are designed to help you build up your credit history and help you qualify for more credit options in the future. These cards typically come with higher interest rates and lower credit limits, but you may be able to increase your limit if you prove you can make repayments on time.

Travel credit card

Travel credit cards are designed for spending abroad. While standard credit cards are likely to charge fees when you use your card outside the UK, travel credit cards will often come with lower fees, if any. This means they would be a cheaper option if you want to use a credit card overseas.

Can I get a credit card with bad credit?

It is possible to get a credit card if you have a bad credit history or a limited credit history. There are specialist credit cards for people with poor credit, so these may be an option if you don’t qualify for a standard card.

Bear in mind that you are likely to be charged a higher rate of interest and have a lower credit limit if you have poor credit.

However, if you make your payments on time, you may be able to increase your credit limit. This would also help you to improve your credit score, which could help you to access more competitive credit cards or other forms of borrowing in the future.

» COMPARE: Credit cards for bad credit

What are the pros and cons of getting a credit card?

Before getting a credit card, it’s important to be aware of their benefits as well as their potential disadvantages.

Advantages of using a credit card

Credit cards can be useful and have a number of advantages, such as:

• They can sometimes be cheaper than other forms of borrowing, IF you pay off your balance in full each month or before the interest-free period expires (if applicable).
• You can use the card to spread the cost of purchases or to pay for any emergency costs if you don’t have the cash immediately available in your bank account, but know it is coming.
• For any purchase you make on your credit card over £100 and up to £30,000, you will have protection under Section 75 of the Consumer Credit Act. This means that if you have a problem with any goods or services you bought with the card, you may be eligible to claim a refund from your credit card provider.
• Some cards may offer cashback or other rewards when you spend, though these shouldn’t be the main reason for choosing a particular card.
• If you make your credit card repayments on time, you can improve your credit score.

Disadvantages of credit cards

However, there are some disadvantages to consider if you plan on getting a credit card.

• They can come with high interest rates if you only make the minimum payments and don’t clear your balance each month (or before your 0% interest deal ends). Interest can add up if you don’t keep on top of your repayments, which could put you at risk of falling into unmanageable debt.
• Credit cards make it easier to spend, so they can be risky and exacerbate existing problems if you’re already struggling with debt, for example.
• Some providers may charge fees, so always check what charges may apply.
• If you don’t have a specialist travel credit card, they can be expensive to use abroad.
• Late or missed payments can damage your credit score and make it more difficult to access credit in the future.

How to choose the best credit card for you

When you come to choose a credit card, the variety of options available can be quite overwhelming. It’s important to research what the best credit card is for you, making sure to consider the following points:

• Why do you want the card and what will you use it for? Do you want it to spread the cost of a major purchase? To transfer debt from another credit card? To use abroad? To build up credit? Whatever the reason, make sure you get the credit card that is best suited to do what you want.
• Check the interest rate on the card. Bear in mind that only 51% of successful applicants are guaranteed to get the advertised representative APR. The remaining 49% can be charged a higher rate.
• If applicable, don’t just look at the introductory interest rate. Make sure you look at what the interest would be after the initial lower rate ends.
• Look out for any extra credit card fees. For example, some providers may charge an annual fee and many will charge a fee for withdrawing cash from your card, so make sure you’re aware of these potential extra costs.
• Check the terms of any cashback or reward schemes. You will typically have to meet certain requirements to benefit from any offers, so make sure you look at the terms and assess how useful these schemes are for you.
• Make sure you know what the minimum payments would be.

» MORE: How to choose a credit card

How to apply for a credit card

If you’ve decided that you want a credit card and you know which kind of card best meets your requirements, the next step is to apply.

As part of your credit card application, you will need to give the provider information, such as your:

• name
• address
• contact details
• date of birth
• income details
• employment status

In some cases, the provider may want to see some supporting documents such as your driving licence for proof of ID.

When you apply for a credit card, the provider will conduct a hard credit check to assess how well you have managed credit and your finances in the past.

This information will help the provider to decide whether to approve your application and, if successful, what interest rate and credit limit you are eligible for.

Applying for a credit card will leave a mark on your credit history, so it’s worth checking your eligibility before submitting a formal application.

Checking your eligibility won’t affect your credit score.

» COMPARE: See what credit card offers you are eligible for

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