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.
Some people prefer credit cards to cash as they can be more secure. If your card is lost or stolen, you can simply report the incident to the bank and cancel the card.
Credit cards also offer protection on purchases over £100 and below £30,000, so for example you booked a holiday and the travel firm goes out of business you should be able to claim the money back from your credit card provider. For more information on how your credit card protects you read our guide.
How to find the best credit card You don’t have to approach your own bank for a credit card; you can apply to any issuer on the market. But the very best deals are usually reserved for customers with a sound credit record.
If you’re looking to make a big purchase then a credit card with a 0% interest rate is what you need.
It’s also worth bearing in mind that you might not be offered the advertised rate. The rules state that only 51% of successful applicants must pay the advertised rate, which means that almost half could be paying a much higher rate of interest.
If you are unsure which type of credit card best suits your needs, our helpful credit card decision tree will ask you a set of questions which will help identify which card might be right for you.
How to find out the likelihood of getting accepted for a credit card
Even if you have the best credit score you might still get rejected for a card or not get the advertised deal. Lenders have their own specifications that they are looking for in customers, making it difficult to predict if you’ll get accepted.
However, there is one way – the MoneySuperMarket Smart Search tool. It doesn’t leave a mark on your credit score and tells you how likely you are to get accepted for a card.