How do credit cards work?

Understanding credit cards

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Having a credit card can be a lifesaver when you have no cash to hand or are in a bind. Read our guide on why it’s a good idea to have one.

Guide to credit card protection

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Credit cards work by giving cardholders access to credit to make purchases, transfer balances and sometimes earn rewards when the loan is repaid in full each month.

This can make credit cards a helpful tool if you want to buy something but don’t have enough money in your current account. If you want to book a holiday, for example, or your washing machine suddenly breaks, using a credit card allows you to pay back the balance at a time when you can afford it.

Another big advantage is the credit card protection offered by Section 75 of the Consumer Credit Act. This means if you buy something that costs between £100 and £30,000, and it is either faulty or the company you bought the item from goes bust, then you can easily get your money back from the card issuer.

However, there are some disadvantages to this type of borrowing. Our guide to credit cards explains the benefits and possible downfalls of using this type of payment method.  

Borrow money for free

When you pay for something with your credit card you are essentially borrowing money – and credit cards charge interest on the loan. However, most cards come with an interest-free period of up to 59 days, so if you pay off your bill in full each month, you pay no interest.

Credit cards work differently from debit cards, in that debit cards take money from your own bank account rather than borrowing it to pay for your purchases.  

Spread monthly payments

If you are unable to clear the debt in full each month, the good news is that you can spread the payments over time. However, this means you will start to pay interest, and when you realise the typical rate is around 18% APR, it isn’t going to be cheap if you have a large balance on the card.

Therefore, it is better to think of a credit card as a short-term fix not a long-term loan. If you can manage to pay more than the minimum monthly payment then you should, otherwise you could incur a lot of interest that could take years to clear.

Penalty charges

There are, of course, downsides to credit cards. If you don’t pay your monthly bill in full, then you could rack up some substantial interest charges – this is how the banks and card providers make their money. There are also penalty fees for late or missed payments that vary with each provider.

But if you play your (credit) cards right, then they can be used as a great way to manage money, especially if you frequently shop online or buy bigger items – because of the card protection in place.

Guide to picking a card

With various types of credit cards available, the right option for you depends on what you want from the card, your spending habits and your credit history.

Cashback and rewards cards: If you always pay off your balance in full each month, then the interest rate becomes irrelevant. Therefore you should look into cards that reward spending, such as cashback cards or rewards cards, that offer air miles, store credit and more.

0% purchase cards: As its name suggests, a 0% purchase card charges zero interest on goods, meaning you can spread the cost of items over time. If you need to buy a bigger item or if you purchase items online regularly, this could be a good option for you.

0% balance transfer cards: Instead of offering interest-free purchases, a 0% balance transfer card allows you to transfer debts from an existing card (or cards) with a high rate of interest onto another without having to pay any interest on the debt. There is a fee for doing this but it is typically worth paying, as it is still likely to be less than the interest on your former card. 

Balance transfer and purchase cards: Some people don’t want to switch cards frequently, so maybe a card that offers both a low lifetime rate and no balance transfer-interest is more appropriate. A balance transfer and purchase card might be the best of both worlds – you could get 0% interest on both transfers and purchases for a certain timeframe.

Overseas spending credit cards: If you travel a lot for work, or just enjoy a holiday, then an overseas spending card could be the right way to go. These are more suitable for frequent travellers because they charge no or low fees for use abroad.

Still not sure? Use our credit card decision tree to find the right card for your circumstances.

Credit history

Whenever you apply for credit, be it a card or a loan, the provider will carry out a credit check – this is to find out whether you are able to pay back the credit. Generally speaking, the most competitive offers are reserved for consumers with a good credit score.

If you have a poor credit history, your application could be turned down. Alternatively, the company may offer you less favourable rates instead of the advertised interest rates, which is known as risk-based pricing.

The rate you see advertised is the ‘representative annual percentage rate’ (APR). This rate must be offered to at least 51% of people whose applications are accepted. This means, however, that the other 49% could be accepted for the card but be charged a higher rate of interest.

Applicants with a low or no credit score (if they haven’t had credit previously) will often find it difficult to get credit. For this reason, banks and card providers offer so-called credit builder cards. Be aware that they may have high rates of interest, but they can help you improve your credit rating.

Finding the best deal

With so many types of cards and providers out there, choosing the correct card can be overwhelming, but MoneySuperMarket’s comparison service can help you find the right card for you.

So whether you want a cashback card, a card for travelling the world, or one for bad credit, we compare hundreds of deals from the UK’s biggest card providers and banks, giving you some of the best offers on the market.

To find out which cards you'd be accepted for without affecting your credit score, try our quick and easy Smart Search. It is free to use and offers some exclusive deals you can't get anywhere else.


Moneysupermarket is a credit broker – this means we’ll show you products offered by lenders. We never take a fee from customers for this broking service. Instead we are usually paid a fee by the lenders – though the size of that payment doesn’t affect how we show products to customers.


Do you want to find out more?  

How to get accepted for a credit card

The advantages and disadvantages of credit cards

How to rebuild your credit score

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