Credit cards are part of everyday life. To get the best from them, it’s useful to know exactly how they work and any pitfalls to watch out for.
Credit cards are part of everyday life. To get the best from them, it’s useful to know exactly how they work and any pitfalls to watch out for.
A credit card lets you borrow money to pay for things. Every credit card comes with a credit limit – that’s the maximum you can spend using the card. You can use them in-person and online. You simply present the card or give the details (including the card number, expiry date and security code) to pay for goods or services. You can usually make contactless payments with them by placing the card on or near a payment machine.
Cards are provided by banks and other financial companies, but they may also be branded based on the rewards they offer (such as from an airline or a store).
If you manage your card carefully, it’s possible to avoid paying any charges. This is the best way to use your credit card. If you pay your bill on time and in full every month and don’t use it for things like cash withdrawals, you won’t have to pay interest or extra charges.
If you don’t pay your bill in full and on time every month, you’ll be charged interest backdated to the date of your purchases. You’ll pay extra fees and interest for withdrawing cash. The interest rate for borrowing cash can be higher than for other types of borrowing.
Some cards charge an annual fee. You might decide to opt for one of these cards if you want the extra perks they offer.
Credit cards can be very useful. They’re convenient, secure and save you carrying cash. Also, many shops and restaurants no longer accept cash.
A credit card can help you build a positive credit history, which is important if you want to get other credit such as a mortgage or loan in the future.
Credit cards also have consumer protection built-in. This means you can often get your money back if things go wrong.
And some credit cards offer useful rewards and perks which you might want.
But if you’re not able to pay your bill in full every month, you might run up debt and extra costs – and your ability to get other loans might be affected.
They’re both convenient ways to pay, but debit cards take your money directly, while with credit cards you're borrowing money you'll need to pay back later.
Debit cards are linked to a bank account. When you use them, the bank deducts money from your account immediately. So, you can only spend what’s in your account.
There are also reloadable or prepaid debit cards. With these you load them up with cash in advance and you can then use the card to spend this money.
If your main reason for getting a credit card is to borrow money rather than it just being a convenient way to pay for things, there are various pros and cons you need to think about.
On the plus side:
On the negative side:
Credit card credit limits cap the amount you can borrow. Your credit limit could be as little as £250 or £500 depending on your credit score. If you’re looking for £3,000 or £4,000, a personal loan might be a better option.
If you can’t pay off the full amount you owe before the interest-free period is up, you’ll end up paying a high rate of interest. There may also be late payment fees as well.
It depends. Card providers set a credit limit – that’s the total you can spend on the card. If you reach that limit your card might be declined when you try to use it.
The amount of credit you’ll get will be decided on by the lender and will depend on things like your credit history, income and other financial obligations.
If you use your credit card to buy goods or services costing between £100 and £30,000 you are usually covered by Section 75 of the Consumer Credit Act.
Section 75 gives you extra protection if anything goes wrong.
For example, if you buy a holiday and the company goes bust, your credit card company can help you get your money back. If you can’t get your cash back from the company that let you down, you can claim the money back from your credit card company.
You can also claim if you order goods that don’t arrive or that are not in the condition described when purchased.
The rules apply to foreign transactions as well as goods bought online, by telephone or mail order for delivery to the UK from overseas.
If you manage your credit card well, this will help build your credit history and boost your credit score.
So, if you pay your bill on time and in full each month and keep well within your credit limit, this will show you can manage your money well and will raise your credit score.
If you’re payments are late and you mostly only make the minimum payment on your card and run up debts, this will affect your credit score.
Making credit card payments on time and keeping well within your credit limit suggests you’re able to manage money and are living within your means. If you want to get a mortgage or loan – or even another credit card – this will give lenders confidence.
You can usually apply online, though you could go into a lender’s branch if you’d rather get help face-to-face. Credit card providers will look into your finances. If you already have a card or cards, a new lender will want to see you’ve kept up payments and stayed within your credit limit(s). If you’re getting a card for the first time, your choice might be more limited.
It’s a good idea to space out applications because applying for lots of cards and loans in a short space of time can affect your credit score. With Experian, you can check whether you’re eligible or likely to be approved before making an application.
With Experian, you can compare credit cards from a variety of companies. And you can see your eligibility rating to check your chances of approval before you apply. We don’t provide credit – we’re a broker. That means we can help you find and compare different offers all in one place.
We're a credit broker not a lender†