How credit cards work

A credit card allows you to spend up to a set amount of money agreed with the lender. 

This is called your credit limit and is usually based on your credit history and income. The better your credit history and the higher your income, the more they’ll let you borrow.

When you have a credit card, you’ll get a statement every month, outlining:

• the amount you owe (this is called your total balance)
• the minimum payment required – the lowest amount you can pay that month
• when you need to make your monthly payment

Pros

• no interest if you pay in full each month and don’t withdraw cash
• you can pay off your balance early without any early repayment charges
• section 75 protection for purchases between £100 and £30,000 – this means you can ask the credit card company for your money back if there’s a problem
• responsible use can improve your credit score
• some cards offer rewards like cashback or travel perks, meaning you benefit from your everyday spending
• provide a safety net in emergencies
• allow you to spread the cost of larger purchases

Cons

• you may have to pay interest if you don't pay off your balance in full each month
• cash withdrawals can sometimes come with fees and immediate interest
• you must make minimum payments each month to avoid penalties
• paying off the minimum each month means it’ll take longer to pay back what you owe and you’ll pay more overall 
• you can't spend more than your credit limit

If you pay off your full balance each month, you won't be charged any interest on what you’ve spent. But you’ll need to pay interest if you withdraw cash.

If you don't pay the full amount, you'll be charged interest on your whole balance. This interest will show up on your next statement.

Credit card interest rates usually fall between 25% and 60%, so it can become quite costly.

Interest-free period

When you first get your credit card, you won’t pay any interest charges for a set time called the interest-free period. This is usually between 20 and 55 days. If you don’t pay the full balance by the due date, interest may kick in.

Some credit cards have special offers that let you avoid interest charges even if you don’t pay off the whole balance each month. Your credit agreement will explain how much interest you’ll be charged and when it’ll be added to your account.

Late payments are likely to harm your credit score.

When you miss a payment, it gets noted on your credit file. Other lenders can see this, which may make it harder to get loans or find good credit deals in the future.

Missing a credit card payment often leads to late fees and losing promotional offers, such as low interest rates. 

To avoid this, set up a direct debit with your credit card provider so your payment is automatically made on the same date each month. You can set up a direct debit for the minimum, full or a custom amount.

There are different types of credit card for different needs. Here’s a simple breakdown:

Cards for low-cost borrowing

• 0% spending credit card: no interest on purchases for a limited time, usually a few months to a couple of years. Cash withdrawals aren’t included.
• 0% money transfer credit card: these let you move money from a credit card to your bank account without paying any interest. There’s usually a transfer fee of up to 4%.

Remember to always make at least the minimum payment to keep your credit score healthy and maintain the 0% interest rate. 

If you still owe money on your balance after the promotional period ends, be ready for high interest.

Cards to lower existing debts

If you’re struggling with debt, taking on more credit isn't usually a great idea, but some cards can help lower costs. 

As well as 0% money transfer cards, there are also balance transfer cards. These let you use a new credit card with a lower interest rate to pay off your old credit or store cards.

Always make minimum payments to keep the 0% rate. Your provider will start charging interest if there's a balance after the promotional period.

Cards for poor/no credit history

Getting a standard credit card can be tough without a good credit history. 

In this situation, you may be able to get a card specifically aimed at those with little credit history or those who have struggled to pay back borrowing in the past. But, take note, these cards come with higher interest rates, sometimes up to 60%. 

To avoid interest, pay off your balance in full each month and don’t withdraw cash.

Rewards credit cards

Some credit cards offer rewards for spending, like cashback or points to exchange for various rewards. You’ll only come out on top though if you pay off your balance each month to dodge charges. There may be yearly fees for these cards.

• cashback credit cards earn a percentage back e.g. 1% on all purchases.
• rewards/airline credit cards let you collect points or air miles for spending, which you can exchange for rewards or flights. 

Travel credit cards

It can be expensive to use regular credit cards abroad due to fees and poor exchange rates. 

Travel credit cards are specifically designed to be used abroad, offering better exchange rates and no extra charges on overseas purchases. Just watch out for cash withdrawal fees!