A credit card can used to make purchases, reduce the cost of expensive debt or to earn rewards and cashback. It is essentially a type of loan, where the money you spend on your card is borrowed from a lender, such as a bank or building society. Interest is added to the amount you spend if you do not clear your balance at the end of each month.
How credit cards work
When you apply for a credit card, you apply to borrow money from the card issuer, usually a bank. The issuer will look at your credit history before it accepts your application – and if you have a low credit score you could be refused credit, or perhaps given a less attractive deal.
If all is well, the bank will set a credit limit, which is the maximum amount you can spend on the card. The card company will send you a statement every month, detailing the transactions on the card, plus the amount owing. It will also provide details on the minimum payment you need to make and the payment due date.
Borrow money for nothing
Most credit cards come with an interest-free period of about 56 days. In other words, as long as you clear the balance in full when you receive your monthly statement, there will be no interest to pay.
If you’re looking to make a big purchase, then a credit card with a 0% interest rate for a specified period is what you need. It’s possible to get a card where no interest is charged for over two years. Once the interest-free period comes to an end, you will then start paying interest of around 19% or more – although one option would be to transfer the outstanding balance to a new card.
Pay more than the minimum
If you do not clear the outstanding balance you will be charged interest. At the very least, you must pay the stated minimum each month, but try to pay as much as you can afford. If you make only the minimum monthly payment, it could take many years to clear the debt.
Our handy credit card calculator will help you work out how long it will take to pay off your balance based on your current payments. You can also find out how your payments will change should you want to clear your balance by a set date.
Beware penalty charges
Anyone who misses a payment or misses the payment deadline will normally have to pay a penalty charge. There is also a penalty if you exceed your credit limit. So it’s important to be in control of your credit card and monitor your statements. And if you are running into problems, contact the card issuer immediately.
Don’t withdraw cash
You can use your credit card to withdraw cash from an ATM, but it’s best to resist the temptation. There is usually a fee for cash withdrawals and the rate of interest is typically higher than the standard rate on the card. Plus, there is usually no interest-free period, so the cash withdrawal will start to rack up interest immediately.
The advantages and disadvantages of credit cards
If you use a credit card cleverly then it’s possible to borrow for no cost, get extra protection on your purchases and even earn cashback or rewards for spending on your card.
But, if you don’t act with discipline you could end up paying lots of interest and racking up debts that are a struggle to pay off.
So what are the pros and cons of having a credit card – and what is the best way to apply for a card and get accepted?
If you need to buy something expensive and can’t afford to pay for it all in one go, then a credit card is ideal, as long as you use it sensibly.
A 0% purchase credit card allows you to pay for the item in full and then spread the costs over a number of months, by making a series of payments to clear the balance.
As long as you pay this total off before the end of the interest-free period then you won’t get charged anything for using the card in this way. But miss this deadline and you will pay a penalty in the form of interest being added to the balance each month.
Borrow for free
Some credit cards offer 0% periods meaning you can effectively benefit from an interest-free loan. You need to make the minimum monthly payments though, and clear your balance before the 0% offer ends though otherwise you’ll be charged interest.
The average interest rate is 18% - pretty hefty, which is why you should pay your debt off before interest kicks in.
Not everyone needs an extended interest-free period, but even if you pay your credit card bill in full each month, you’ll still ‘borrow for free’. Credit card statements quote that you get ‘up to 59 days interest free’ – what this really means is as long you pay off your bill in its entirety by the due date, you won’t be charged interest. This can be a great help in managing your cash flow.
Earn while you spend
Some cards even offer incentives to spend, such as cashback, loyalty points or air miles, which means you could actually make money from your credit card. These are only worthwhile if you pay your bill in full – otherwise the interest you’ll be charged will be more than the value of the rewards.
Switch your balance
If you owe money on credit or store cards, taking out a new card could actually be a good option. You'll probably be paying interest rates of at least 18%, but you could cut that to zero by transferring your debt onto a 0% balance transfer card.
There will be a transfer fee to pay of around 3%, but it's usually worth it as it will still be less than the interest you'll be charged if you stick with your existing card.
Ensure you pay your debt off before the end of the 0% period though as you will then be charged interest on any debt you still have. You can use our Smart Search tool to find out how likely you are to get accepted for each card.
Beware the debt trap
It's important to remember that a credit card is a form of borrowing. You buy now and pay later - and there are risks.
If you don't pay off your balance in full each month, you will start to rack up interest. Your debt can therefore quickly spiral out of control, particularly if you pay off only the minimum monthly amount.
You should therefore always try to pay more than the monthly minimum and you should think of your credit card only as a short-term borrowing facility. You can find out how your balance is affected by changing your monthly repayment amount with our credit card calculator.
The interest rate is not the only cost of a credit card. A fee will be charged if you are late making your monthly payment, or miss it altogether. You'll also pay a penalty if you exceed your credit limit. So make sure you keep track of your spending and always pay your bill on time.
And don't be tempted to withdraw cash on your credit card. Most card firms charge a fee to withdraw cash from an ATM, typically about 2%. You will also start to rack up interest immediately as there is no interest-free period on cash withdrawals.