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Credit cards explained

What is a credit card?

A credit card is a plastic card that allows you to buy goods and services using money you borrow, as opposed to a debit card that uses money that you already have in an account.

Credit cards are usually powered by Visa, MasterCard or American Express to process payments.

Because they don’t require any collateral, credit cards are a form of unsecured borrowing. 

How do credit cards work?

When you apply for a credit card, the provider will give you an agreed credit limit which is the maximum you can borrow on your card.

The credit limit could range from a few hundred pounds to several thousand pounds, depending on your credit history and income, for example.

You can use the card in any way you choose, such as to pay for a new car, a holiday, a new appliance, groceries and more. However, depending on the type of card you have (discussed below), there may be certain charges for different uses.

When you spend with a credit card, the provider pays the required amount to the retailer, and you then repay the provider the amount you borrowed.

Unless the card comes with an interest-free period, you will be charged interest on your balance.

Every month, you’ll need to make at least the minimum payment set by the credit card provider, but you can pay more than this to reduce the amount you owe and the interest you pay.

Types of credit card

There are several different types of credit card available in the UK, and the right one for you will depend on what you want to use the card for.

Purchase credit cards

As the name suggests, these credit cards are designed for spending and making purchases. There are interest-free credit cards available which offer 0% interest for a specified period. As long as you only use it for purchasing, make at least the minimum payments and pay off your card in full before the 0% period ends, these allow you to borrow without paying any interest at all.

Balance transfer credit cards

These cards are designed to consolidate your existing credit card debt and cut the interest you pay. For a small percentage fee, you can move a balance from one credit card to a 0% balance transfer credit card that offers a specified interest-free period. This can help you save money on interest, providing you meet the terms of the card and clear your balance before the end of the 0% period.

Reward credit cards

Reward credit cards, such as cashback credit cards, allow you to make money or get extra benefits from your spending. For example, cashback credit cards pay you a percentage of the amount you spend while reward credit cards may offer vouchers and money off selected retailers. However, to maximise the benefits of these cards, you shouldn’t spend more than usual, and you should pay off your balance in full every month to avoid interest charges.

Credit builder cards

If used responsibly and managed correctly, credit builder cards (also known as credit repair cards) could help to build up your credit score. They may be useful for those with a poor credit score or a limited credit history, but it’s important to make your repayments and not build up expensive debt on the card.

Travel credit cards

These specialist cards are suitable for spending abroad. Standard credit cards may charge foreign transaction fees, whereas travel credit cards can charge lower, or no, fees.

Money transfer cards

If you want to move money from a credit card into your bank account (to pay off an overdraft, for example), a specialist money transfer credit card allows you to do this (for a fee). These cards may offer a limited interest-free period, but you have to clear your balance before interest charges apply.

Is it a good idea to get a credit card?

Credit cards can be handy in many ways, but you need to be careful about how you manage them as they can be risky. You could describe them as a “double-edged sword”.

When deciding whether to get a credit card, you need to think about why you want it. Do you want it as back-up in case you face an emergency expense or to spread the cost of an upcoming large purchase? Or do you want a credit card to take advantage of the extra benefits it may bring, such as cashback, or to reduce the cost of your existing credit card debt?

All of these are valid reasons to take out a credit card, but you should only apply for one if you’re confident you can manage it responsibly.

If you think a credit card could tempt you to overspend or that you may struggle to make payments, applying for one is unlikely to be a good idea as you could end up accruing expensive debt.

Similarly, if you want a credit card because your finances are stretched and you need to borrow to cover your regular expenditure, you should seek debt help rather than applying for more credit.

See our guide to help you decide whether to get a credit card.

What’s the best credit card in the UK?

The best credit card for you depends on your requirements and what you want the credit card for.

There are a range of cards available and each individual provider charges different interest rates and offers different features, so it’s worth comparing the options that are available.

You can see the variety of credit cards available and the rates on offer by choosing one of the charts at the top of the page.

How to choose a credit card

Some of the key features to consider when choosing the best credit card for your requirements are:

• the interest rate
• whether there are any introductory interest-free periods for purchases or balance transfers
• if there is a card maintenance fee, a cash withdrawal fee or any other fees charged as standard
• whether there are any rewards or cashback available with the card
• the cost of using your card abroad

These are just some of the points to consider when selecting a credit card, and some will be more important to you than others. A credit card comparison tool can help you to assess the features of each card to help you find the right one for your situation.

How do you apply for a credit card?

Most providers allow you to apply for a credit card online, but you may also be able to apply via mobile app, by phone or in-person at a branch if you prefer.

You can often check your eligibility for a credit card before applying and without affecting your credit score, which could help you see whether you qualify for a credit card. You may also be able to see details such as the interest rate and credit limit you may receive on a card.

When you apply for a credit card, you’ll need to provide some personal details, including your name, address history, employment status and income. You may also need to detail your expenses, including rent or mortgage payments, bills and any loan or credit repayments, for example.

The provider will run a hard credit check as part of the application process, which will appear on your credit report.

Using all this information, credit card providers will decide whether to approve your application and, if so, under what terms.

Your application for a credit card is more likely to be successful if you have a good credit history and your income and expenditure shows you can comfortably afford to make repayments. You may also be more likely to qualify for more competitive rates and access a higher credit limit.

Although having a poor credit history doesn’t necessarily mean you can’t get a credit card, you may face higher interest rates and a lower credit limit. As a result, it may be worth improving your credit score before applying for a credit card.

How quickly can I get a credit card?

It may only take a few minutes to apply for a credit card and receive a decision from the card provider. However, it may take longer if the provider needs more time to review your application.

Once approved, it could take several working days to receive your PIN and credit card through the post.