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What is a credit card

A credit card is a handy way to buy things without having to carry loads of cash around with you. When you buy something with your card, the credit card company pay for it, effectively lending you the money. Then you pay them back at the end of the month, or in instalments over several months.

Because most credit cards have an interest-free period on card purchases if you pay your balance in full each month, you get a bit of breathing space to pay off the money you’ve borrowed.

As long as you use credit cards wisely, taking advantage of interest-free periods and avoiding fees where possible, they can be a convenient way to pay for things.

You may incur fees and or interest depending on which card you choose.

Choosing a credit card

There are lots of different types of credit card and the choice can seem overwhelming, so we’ve covered the main ones for you here.

A balance transfer is when you use your credit card to pay off the balance from another credit or store card. Because you then owe your new credit card provider money instead of the original lender, you’ve effectively ‘transferred’ the balance to your new credit card.

As long as the credit card you’re moving the balance to has a lower interest rate, and depending on any balance transfer fee, this can be a handy way to reduce the amount of interest you pay and save money.

‘Balance transfer cards’ are simply credit cards which offer reduced introductory rates for making balance transfers, though you can also use them to shop with as normal.

Some things to consider:

  • How long will the introductory rates last?
  • Is there a fee for making balance transfers? A card may offer an attractive rate, but if the rate doesn’t last long or you’re charged a lot for making a transfer, you might not save money in the long run.
  • What will the standard interest rate (commonly referred to as APR) be after the introductory rate has finished? That’s the rate of interest you’ll pay on any balance you have left.
  • If you also use the card to buy things before you’ve paid off your transferred balance, make sure your monthly payments will be used to pay off your higher interest ‘retail’ balance first, and not your lower interest ‘transferred’ balance.

Put simply, retail cards are designed for spending.

They’re a type of credit card which often give you a reduced interest rate on the purchases you make with your card. Sometimes the lower rate is a permanent feature of the card, or it may be a promotional offer, which reverts to a higher interest rate at the end of an introductory period. Either way, they usually give shoppers a bit more breathing space to pay off their purchases before they attract interest.

Some things to consider

It’s important to know how long the introductory rate on a retail card will last, and what the standard interest rate (commonly referred to as APR) will be once it has finished. If you don’t pay off all your balance before the introductory rate finishes, the standard interest rate (commonly referred to as APR) is the rate you’ll pay on what’s left.

‘Balance transfer and retail’ cards generally offer the best of both worlds – low introductory interest rates on balance transfers, and also on what you spend.

These cards are handy if you’re looking to save money by paying off your existing debts at a lower rate, but you also have things to buy.

Some things to consider

Just like individual balance transfer cards and retail cards, it’s important to know how long your introductory rates will last, what the standard interest rate (commonly referred to as APR) will be once these rates have finished, and any fees which may apply.

Some credit cards reward you for spending on them. The rewards are often cash back, air miles, or points you can redeem in shops.

Reward cards are a good choice if you can pay off your balance before interest starts building up, otherwise the interest and fees could outweigh your rewards.

Some things to consider

If you’re looking at a cash back card, make sure you know how much cash back you’ll earn, how you’ll receive it, and how often it’s paid out.

To take full advantage of a ‘points’ card, check you’ll earn points with retailers you use regularly and that you can redeem the points for things you use. You won’t benefit from building up points to use in places where you never shop. Some points schemes may let you swap points for shopping vouchers which are worth even more.

Like a reward card, you earn cash back or ‘points’ every time you spend with a charity credit card. The big difference is the money is donated to your charity.

So, charity credit cards are a great way to raise money for a cause you care about while going about your everyday life. Without lifting a finger, they let you give automatically every time you shop, eat out, or buy petrol on your card.

Some things to consider

These cards offer the best value if you can pay off your balance before you start building up interest, otherwise the interest and fees could outweigh your donation.

Whichever card you choose

Here are some important points to consider with any credit card:

  • Credit cards offer you protection on the things you buy. If you spend between £100 and £30,000 on your card and the goods turn out to be faulty or the company you’ve bought from goes bust, you can claim the money back from your credit card provider.
  • Some credit cards have annual fees, so always check this out. Whether these fees work out as good value will depend on the type of card you go for, and how you use it.
  • Some credit card providers use ‘risk based pricing’. This means the APR they advertise can change once you apply for the card, depending on your personal circumstances.
  • Make sure you have a close read of the terms and conditions of any credit card before you apply for it to make sure it suits your needs.

Applying for a credit card

When you apply for a credit card, the card provider will ask for your personal details, details of any debts you have, and information about your monthly outgoings.

They’ll also look at your ‘credit file’, which includes information about your other credit arrangements, any missed payments or County Court Judgements (CCJs).

The credit card provider will use all this to decide whether to offer you a card or not, and if so, how much you can borrow. The total amount you can borrow is known as your credit limit.

Don't forget

Every time you apply for a credit card, whether your application is successful or not, it’s noted on your credit file. Therefore, it’s important you don’t apply for too many credit cards, as this could count against you applying for credit in future.

Making repayments

Your credit card provider will require you to make at least a minimum repayment each month, which they use towards paying off your balance in a certain order. You can usually pay this by debit card, as a bank transfer, online, or at the Post Office®.

Your minimum repayment is usually a small percentage of the total amount you owe, and it’s important to make this payment on time to avoid being charged a late payment fee.

It is a good idea to pay more than the minimum each month, better still, to avoid paying interest make sure you pay your statement balance in full and on time each month.

Here are some tips to help you keep the amount you repay to a minimum

  • If you can always pay off your balance in full each month, you shouldn’t pay any interest.
  • If you can’t always pay off your balance in full, make sure you know when your introductory and promotional rates end, and what gets paid off first, to limit the amount of interest that builds up.
  • Check how long your minimum repayment will take to reach your credit card provider. Even if you make your payment on time, if the money doesn’t reach them by your payment due date you could still be charged a late payment fee.
  • Setting up a direct debit for your minimum repayment is a great way to avoid ever getting a late payment fee. You can usually set up the direct debit to pay off the minimum repayment or whole balance each month. You can also make additional one-off payments during the month if you wish.

Worried about debt?

If you're worried about building up too much credit card debt, there are lots of places you can get help and advice.

Useful links

If you'd like to know more about your credit file, equifax.co.uk link opens in a new window Link opens in a new window or experian.co.uk link opens in a new window Link opens in a new window are good places to start.

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