How do credit cards work?

If you’re looking to spread the cost of a purchase or cover a one-off cost like a deposit on a holiday or for a car, a credit card might be a good option to consider. You may also choose to pop your everyday purchases on there, such as groceries or household expenses rather than have the money immediately leave your account via a debit card payment.

 A credit card allows you to borrow and spend money, up to a certain limit.

You can also use it to transfer and pay off an existing balance, or to get a cash advance – there may be fees for doing either of these. The money you borrow will need to be repaid and please remember you may incur interest.

Why is a credit card useful?

A credit card can be a convenient and flexible way to make purchases without using your immediate cash, as well as paying for digital subscriptions or items when shopping online. Most credit cards offer protection against fraud or unauthorised transactions, so you have extra security when making purchases.

If you pay your bills on time, regular credit card use can help you build or improve your credit score. A useful way to remember to pay your bill on time is to set up a Direct Debit for the payment.

It’s also reassuring to know that Section 75 of the Consumer Credit Act 1974 protects credit card purchases between £100 and £30,000, which lets consumers claim a refund if goods are faulty or the supplier breaks the contract.

Depending on the type of card you have, you may also earn credit card rewards to put towards lifestyle expenses, such as travel or entertainment, or get cashback.

Compare different types of credit cards

What are the different types of credit card?

There are several different types of credit cards that are designed for specific purposes and circumstances.

Purchase credit cards

Purchase credit cards allow you to borrow money to pay for goods and services, such as groceries, and any other small or large purchases that you make (as long as they don’t exceed your credit limit).

Some purchase cards have 0% purchase periods, but interest is charged on the balance if not cleared before the end of the 0% period.

Every month, you’ll need to make at least a minimum payment towards your balance. If you make the minimum payment but don’t clear your full balance at the monthly due date, you will be charged interest on the remaining balance.

Balance transfer credit cards

Balance transfer credit cards let you transfer debt from an existing credit card onto a balance transfer card to pay it off during a promotional low- or no-interest period. After this promotional period, a standard interest rate will apply to any remaining balance on your card so you might want to pop a reminder in your calendar of when the promotional period ends.

Remember there may be a transfer fee to move the debt from one card to the other.

Low interest credit cards

Low interest credit cards have a simple, low APR and may come with a promotional zero-interest period on purchases or balance transfers. They’re typically designed to help you pay off existing credit card debt through a balance transfer, or for situations where you need to make an unexpected purchase.

As with any credit card, approval depends on your financial circumstances. Not everyone is eligible for the low interest rate that the card provider advertises.

Student credit cards

Student credit cards are specifically designed for people who are enrolled in a program or course at college or university. They can offer financial flexibility and help you spread the cost of purchases while you’re studying.

Student credit cards can help build up your credit profile, as long as you make the minimum payment on your statement balance, on time. Starting to build a healthy financial footprint can help make it easier to get a loan, such as a mortgage, in the future.  

How will I be charged when I use a credit card?

There are a few factors that affect how much you’ll be charged when you use your credit card:

• Interest charges are calculated based on your APR and will apply to any remaining balance after your monthly payment due date.
• Balance transfer fees may be charged if you’re transferring your balance to another card.
• Cash advance fees may be charged if you’re withdrawing cash using your credit card.
• Annual card fees may also apply, depending on the credit card provider.
• Late or missed payment fees may apply if you don’t make your minimum monthly repayment on time.
• Currency exchange fees may apply if you travel abroad and use your card to spend in another currency.

Fees and charges will vary depending on the type of credit card you have, the terms set out by your card provider, and your own financial profile and spending habits.

Always familiarise yourself with the associated costs of a credit card before spending, to make sure you know what to expect.

Credit card statements explained

Your credit card statement is key to managing your spending, repayments, and overall balance.

Each month, you’ll receive a statement that summarises the activity on your credit card, including purchases, payments, and fees. It will also outline the minimum payment you need to make as well as the total spend you’ve made against the card and when payment is due.

It’s a good idea to make it a habit to review your online statements on a regular basis. You can do this through internet banking and mobile banking rather than waiting for a statement through the post.

How do credit card payments work?

When you make a payment on your credit card, you’re repaying what you’ve borrowed and any interest charges or fees you may have been charged.

You can choose to pay off your full balance, a fraction of this balance, or make the minimum payment outlined on your statement.

Paying the full balance means you will avoid interest charges. Paying less means you’ll be charged interest on whatever balance is remaining. If you don’t make the minimum payment on time, you may be charged a fee.

How do credit cards affect my credit score?

The way you use your credit card has an impact on your credit score. Making payments on time , and keeping your activity consistent can help you build a positive credit score.

Learn more about your credit profile and how to check your credit card eligibility.

Our final thoughts

Credit cards can be a useful whether you want to spread the cost of a purchase, transfer a balance, or build your credit score. Get in touch with our team to learn about different credit cards and which option might be the best fit for you.

18+ and UK resident only. Lending is subject to approval. Credit limits, promotional periods and interest rates will vary based on your individual circumstances. To remain eligible for promotional rates you must stay within your credit limit and make your payments on time each month.