If you’re thinking of getting a credit card for the first time, it’s a good idea to understand exactly how they work. Credit cards are a convenient way to pay for things, but there are some pitfalls to watch out for. Learn all about credit cards here.
A credit card lets you borrow money to pay for things. Whenever you use your card to pay, you’re effectively borrowing money. The total amount you owe at any time is called the ‘balance’.
There’s a maximum amount you can spend on your card, and this is called the ‘credit limit’.
You have to make a ‘minimum payment’ every month to pay back what you’ve borrowed. If you don’t pay back the total you’ve spent, you’ll usually be charged ‘interest’. Using a credit card helps you build up a ‘credit history’.
You can use cards in-person and online. You present the card or give the details. You can usually make contactless payments with them where you just place the card on or near a payment machine or have the card details on your phone. Banks and other financial services businesses provide cards, but they might be branded in terms of rewards they offer – from an airline or a store, for example.
The card has a unique number, an expiry date and a security code. You’ll get a statement every month showing your spending and any payments you’ve made. The card provider also usually has an app which you can use to see how much you owe.
Credit cards are convenient and secure. You can build a positive credit history, which is important for getting a mortgage or other loans in future. They have consumer protection built-in. And they might offer useful rewards and perks. But if you can’t pay your bill in full every month, you’ll run up debt and extra costs – and your ability to get other loans might be affected.
If you manage your finances carefully, you won’t pay anything. This is the best way to use your card. If you pay off the balance in full every month and don’t make cash withdrawals with it, you won’t be charged interest or extra fees.
Some cards have annual fees which you might decide are worth paying for as you want the perks they offer.
If you don’t pay off your credit card bill in full each month, you’ll be charged interest backdated to the date of your purchases. And there are extra fees and interest for withdrawing cash.
The interest rates on credit cards can be higher than with other types of borrowing.
Your card provider will set a credit limit for your card. If you reach that limit your card might be declined when you try to use it. Credit limits – and the leeway lenders give if you’re trying to exceed them – depend on your circumstances, including your credit history, income, and other financial obligations.
Average limits are £3,000 to £4,000 but yours could be much less, or much more.
There are various options.
With interest-free purchase cards you won’t be charged interest for a few months or even a few years – but you’ll need to stick to terms and conditions. And the interest rate might be high compared to other cards once the free period ends. To get one of these cards you usually need a good credit score and it will be tougher to get a special deal without a credit history.
If you already owe money on your credit card, a good option might be a balance transfer card. These offer a special interest-free period if you bring debt from another card. Switching cards can be quite straightforward.
If your main reason for getting a credit card is to borrow money, not just a convenient way to pay for things, bear these points in mind.
On the plus side it might not cost you anything. But you might only be able to borrow £250 or £500 depending on your credit score. If you can’t settle the whole bill before the interest-free period is up, you’ll end up paying a high rate of interest. And there’s likely be extra late fees.
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 another credit card – this gives lenders confidence.
You might be able to get a secured credit card or a student credit card if you don’t yet have a credit score.
With a secured card you’d have to pay a deposit – often the amount of the credit limit.
Student credit cards will have eligibility criteria.
Another option is to use store cards to help you build up a credit history and have a better chance of getting a credit card in future.
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 but you can only use these if you’ve added money to them.
Section 75 of the Consumer Credit Act 1974 applies to most card purchases of over £100 and up to £30,000 and protects you if things go wrong. For example, if the company you buy from sells you faulty goods or goes bust, your credit card provider could help you get your money back.
You can usually apply online, though you could go into a bank or other credit provider’s branch if you’d rather get help face-to-face. 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 compare credit cards from a variety of companies. You can also 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†