nigel woollsey

Nigel Woollsey

Online Writer
Published: 11/02/2019

At a glance

  • A credit card enables you to pay for goods and services up to an agreed credit limit.
  • Unless you can pay off the whole amount owed every month, you will be charged interest on the money you’ve borrowed. Check carefully to find out what a credit card provider’s interest rates are.
  • Some credit cards may offer you additional rewards and/or cashback for using them.
  • Credit cards are an example of unsecured debt – i.e. you have not put up your home or car as security against the loan. 

What is a credit card?

A credit card, at its core, is a plastic card that you can use to buy goods and services using money you borrow, as opposed to a debit card that uses money that you already have sitting in an account. Credit cards tend to come with far more restrictions for applicants and charges than debit cards, precisely because you are using someone else's money. This is why it's so important to make sure you choose the best credit card for your circumstances that you can find, to minimise extra costs.

How do credit cards work?

A lender must agree to give you credit before they hand over one of their coveted cards, on the understanding that you will be paying them back the funds you spend, as well as any previously agreed charges and fees. The lender will want to know your credit history – if you have or have had any debt in the past, and how you've handled it – before they can decide whether you're trustworthy, and what interest rate they would be willing to offer you.

Once you've got the card, you can use it in any way that you like (though beware that there will be different charges depending on the kind of card and how you use it, explained further below). Just remember to pay back at least the minimum required every month, and more if you can, otherwise your debt may get out of control.

Which credit card is right for me?

To know which card will work best for you, you'll need to know what different types are available, and what they do:

  • If you want to consolidate debt
    0% balance transfer cards can be ideal for consolidating debt, as they give you a certain number of months (or even years) interest-free to pay off the balance you put on the card. Although they usually come with a balance transfer fee, it is likely to be cheaper than leaving your balance on a typical card paying your purchase rate (though note that there are interest-charging cards that may charge no fee, which could turn out to be more suitable for your needs). Similarly, you can also find cards that offer 0% money transfer deals, which can be used to transfer funds to your current account to pay off overdrafts as well.

 

  • If you want to make purchases
    0% purchase cards allow you to make purchases for a certain number of months without paying interest. If you're looking to make a big purchase or want to take advantage of (online) purchase protection, these cards could be for you. As with balance transfer cards, it's recommended you pay off what you owe on these cards before the introductory period ends, so you can avoid paying interest altogether, and remember to pay at least the minimum amount each month otherwise the introductory offer might be withdrawn.

 

  • If you want to consolidate debt and make purchases
    0% interest cards combine the above, giving a certain number of months interest-free on balance transfers, purchases and sometimes also money transfers, in case you've got both debt and more purchases you need to make. These cards will probably be less generous than the single-purpose cards, with shorter interest-free terms, so always compare to find the best credit card deals.

 

  • If you want to be rewarded for making purchases
    Cashback credit cards give you a certain percentage of cashback every time you use the card to make a purchase, which means you could actually make money shopping if you manage to pay off the balance and avoid interest every month. In the same vein, reward cards allow you to get certain non-monetary rewards for using them.

 

  • If you're going abroad
    Travel credit cards are designed to be specifically used abroad – unlike other credit cards, which tend to charge high fees for any use outside of the UK. So, if you're going away and would rather not rely on travel money or a prepaid travel card, or you would prefer to pay off the balance after the holiday rather than save up in advance, one of these cards may be for you.

 

  • If you need to repair your credit score
    Credit repair cards, if used responsibly, allow you to repair a credit rating that has been damaged by debt accrued in the past, or can help you build a rating if you've never had credit before. Make sure you don't have any other credit cards or debts that could undo all the good work of using these cards, and remember to repay them every month, and you should be able to get your credit score back up to scratch over time.

Whatever you need, make sure you compare credit cards to find the best credit card deals. Also, check that you are eligible before you apply for credit, and that doesn’t just mean having a good credit rating. Are you old enough? Have you been a UK resident for long enough? Some lenders may insist you earn a certain amount per year, or that you already have an account with them, so check that it’s a good fit before you apply, otherwise you may jeopardise your credit score for no reason!

What makes one credit card better than another?

Aside from looking at which introductory offer is more generous, the main thing to look out for when you compare credit cards is the APR (annual percentage rate) that is charged. Credit cards are regulated by the Financial Conduct Authority (FCA), which requires a clearly indicated APR that allows easy comparison between cards. This relates to the interest that at least 51% of customers will be offered on standard purchases per year. This makes it easy to compare credit card rates at a glance but remember that you may not get this rate; bear in mind too that if you're looking to use the card solely for transferring debt, you may want to look at the interest charged on that instead.

Next to interest rates and introductory offers, you may also want to look at eligibility criteria and how you can apply for and manage the card. A card that is appropriate for most people might not be the right fit for you, which is why it's so important to always compare the best credit card offers to find the one that's best for you.

Pros and cons of credit cards

  • Can help you spread the cost of a large purchase over multiple months. If you’re successful applying for a credit card deal with an introductory 0% interest offer on purchases, you wouldn't even have to worry about interest adding to your debt for specified introductory period.
  • If you get paid on an inconvenient day of the month, you could use a credit card to pay for purchases/bills and then pay that off as soon as you can to avoid interest adding to the balance.
  • Credit card purchases are protected under the Consumer Credit Act 1974. So, if you buy something between £100 and £30,000 in value using a credit card that turns out faulty, substandard or undelivered, you can get your money back from your lender if not from the supplier. This may apply even if you've only used the credit card for your deposit and to online purchases as well.
  • Some cards offer cashback or other rewards that could make them quite lucrative, if used responsibly.
  • Some providers allow you to consolidate your debts onto one card, known as a balance transfer card.
  • Using a credit card can result in an increasing amount of debt if you don't pay back the funds within a reasonable timeframe. Always search the market for the most suitable deal or you could end up owing a lot more money than you've used due to high monthly interest rates being charged.
  • It's always a good idea to look out for hidden costs or other extra charges that could make using credit costlier than it needs to be.

What charges and fees will I have to pay?

You'll have to pay interest based on the rate that your lender has set unless you manage to pay off the balance each month before interest can be charged or you are benefitting from an interest-free period. Additionally, most providers charge fees for balance and money transfers, as well as for taking out money.

Unless you're getting a travel credit card, you will likely pay fees on withdrawals or any spending made abroad, and even travel cards might still charge something. Last, but certainly not least, be careful as some lenders charge an annual fee for having the card, even if you don't use it.

What will my credit card limit be?

Your credit limit will depend on your credit score and other criteria, so there is no way to know until you've applied. That's why it's important to make sure you choose a competitive card and have your finances under control before you apply.

How long does it take to apply for a credit card?

After you've chosen the best credit card offer for your needs, you will have to supply the provider with personal details so that they can run a credit check. If you apply online, this process can take as little as 15 minutes, whereas applying in branch or by post can take somewhat longer.

How long until I get my credit card?

Different lenders will take different amounts of time to approve your application (this will again depend on how you apply) and send over the card. Generally, however, you can expect your plastic friend around 10 days after you've been approved. Still, if you need it for a specific purpose, apply for a credit card a month in advance to be sure you get it on time.

Are credit cards unsecured debt?

As you are not required to put your property or possessions up as security when taking out a credit card, they can be considered unsecured debt. However, if the situation gets so bad that you are unable to pay back what you've lent without selling your car or house, these possessions could still be at risk.

How do credit cards affect mortgage applications?

Mortgage applications require credit checks, to make sure you're a safe bet for the mortgage provider. Since your credit rating is affected by owning a credit card – positively if you've managed to pay the balance off every month, negatively if you've accumulated debt on it and/or missed payments – your credit card will most certainly affect the success of the application. For that reason, it's a good idea to check your credit score before you apply for either a card or a mortgage.

Can purchases on credit cards be refunded?

As mentioned above, under Section 75 of the Consumer Credit Act 1974 you may be refunded for a purchase that is faulty, substandard or has gone missing.

Are credit cards contactless?

This depends on the provider, but there is certainly an increasing number of credit cards available that allow contactless payments.

Can credit cards be used at ATMs?

Yes, but due to the high charges usually associated with this it is not advisable to use a card for cash withdrawals.

Can credit cards be in joint names?

While it is possible to have multiple cards tied to the same account, there is always one person solely responsible for the debt that is accrued on the account. So, while you can arrange for your partner (for instance) to get a credit card on the same account, you would be responsible for ensuring that the balance gets paid off.

Can credit cards be used for direct debits?

In the UK, credit cards cannot be used for direct debits. However, you may want to consider setting up a direct debit from your bank account to pay off (a certain percentage of) your credit card debt each month.

Moneyfacts tip

Moneyfacts tip nigel woollsey

When shopping online, always make sure you're on a legitimate website before typing in your credit card details, and never give the long number on the front of the card out to someone in the street or knocking on your door, no matter how legitimate they may sound.

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

bank cards in back pocket

At a glance

  • A credit card enables you to pay for goods and services up to an agreed credit limit.
  • Unless you can pay off the whole amount owed every month, you will be charged interest on the money you’ve borrowed. Check carefully to find out what a credit card provider’s interest rates are.
  • Some credit cards may offer you additional rewards and/or cashback for using them.
  • Credit cards are an example of unsecured debt – i.e. you have not put up your home or car as security against the loan. 

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