Our simple guide to understanding credit cards
Credit cards can be a helpful tool for managing your finances. Our guide explains more so you can decide if a card is right for you
What is a credit card?
A credit card is a way of borrowing money to pay for goods and services with the promise that you’ll repay what you owe at a future date – sometimes with interest added, depending on your card and how you use it.
They can offer flexibility with your finances whether it’s to help spread the cost of an expensive purchase, help with paying off debts, building your credit score, or even earning cashback and rewards. Our guide to What is a credit card? explains more.
How do credit cards work?
Compare deals with MoneySuperMarket and we’ll show you cards from our panel of leading providers. You can then apply for your chosen credit card.
Once you’re approved for your credit card you’ll be given a set credit limit – this is the amount you can spend up to on the card.
You can use your card to make purchases for goods and services up to your credit limit.
Keep tabs on your spending by checking your account online or through a credit card app. You’ll also receive a monthly statement telling you how much you owe.
Pay off the balance by the date required – usually 21 days after you receive your statement.
If you don’t pay off the full amount you’ll typically incur interest. You must pay at least the minimum monthly repayment amount. Your card provider will make it clear what this minimum amount is. If you can’t meet this monthly minimum you will be hit with penalty fees or added interest – or both.
How do the different types of credit card work?
There are many types of credit card and the right option for you will depends on what you want from the card, your spending habits and your credit history. Here’s how each type of card works:
Card providers can attract new customers by offering purchase cards that charge low or zero interest on your spending for a set period, such as three or six months for example. It can be a useful budgeting tool if you need to make a large purchase as you can spread the repayments (often without incurring interest) over a longer period.
Balance transfer cards
A balance transfer card allows you to transfer debt from an existing card or loan with a high rate of interest, without having to pay much or any interest on the debt for a set period. There will usually be a one-off fee charged for this, such as 3% of your debt balance. But often it makes sense to pay the fee as you will still make big savings by moving your debt to the low or 0% interest balance transfer card. Bear in mind these cards are not usually suitable for new spending as they tend to have high interest rates on this. And aim to clear the debt before the low or 0% interest period ends or the interest rate or APR will typically spike up
Balance transfer and purchase cards
If you don’t want to switch cards frequently, a card that offers both a low lifetime interest rate and no balance transfer-interest could be attractive. A balance transfer and purchase card can be the best of both worlds – you could get 0% interest on both transfers and purchases for three or six months, for example.
Money transfer cards
These cards allow you to move cash from a card to your bank account to clear your overdraft or give yourself a cash loan at a low interest rate for a fixed period. There is a one-off fee. Ask the lender to transfer the credit amount into your bank – don’t withdraw it as cash as this could incur higher interest.
Cashback and rewards cards
Cards that reward spending, such as cashback cards or rewards cards, offer a range of perks and benefits, such as air miles, store credit and cashback. Banks offer these incentives as a way of gaining your loyalty in the hope that they’ll make money through card interest repayments or fees (some cards charge a monthly or annual usage fee). But use them wisely – staying on top of your debts and repaying in full each month – and you can earn the perks and benefits without paying interest on your card spend.
Credit builder cards
Credit builder cards typically have low credit limits and high interest rates, but they allow you to build up trust with providers and grow your credit score. The best way to build your credit score is to spend only a portion of the credit available to you every month and then pay off the balance in full and on time. As your credit rating improves you should have access to better credit card deals – at lower interest rates and with a higher credit limit.
Overseas spending credit cards
Overseas spending cards charge no or low fees for use abroad, which makes them more suitable for frequent travellers. If you travel a lot for work, or need a card to use on holiday, these types of cards can be beneficial. Typically you’ll get better rates of exchange on currency when you spend on the card and overseas usage fees are lower than those on standard credit cards.
Still not sure on the best card for you? Use our credit card decision tree to find the right card for your circumstances.
Where can I use a credit card?
Just like a debit card, you can use a credit card in most places – shops, supermarkets, hotels, pubs and restaurants, to make payments either through contactless or chip & PIN for higher amounts. As well as high street shops you can also use your credit card to make payments online or over the phone.
Remember while you can use a credit card to withdraw cash from a cash machine this will usually be an expensive way to borrow as you’ll be typically charged a high rate of interest on the money – and interest will be charged from the day you take out the money.
It can be useful to pay for expensive goods and services, particularly holidays, using a credit card because they offer Section 75 protection. This can help you get your money back if anything goes wrong with the transaction, for example a supplier or airline goes bust or your goods are faulty.
But while credit cards are accepted in increasing numbers of outlets – hastened by the pandemic where retailers were less keen to handle cash – not all credit card networks are accepted everywhere. For example, some shops may not accept American Express due to the fee the retailer has to pay for the transaction.
Why should I get a credit card?
There are a number of advantages to having a credit card and different cards are designed for different needs. Some of the benefits of card use include:
Spreading the cost of a big one-off and emergency purchases
Moving existing debt to give you time to pay it off interest-free
Offering protection when buying goods and services through Section 75
Building or repairing your credit score
Spending fee-free at lower exchange rates when overseas
Read more with our guide to Why do I need a credit card?
Am I eligible for a credit card?
It’s quick and simple to find out if you’re eligible for a credit card when you search with MoneySuperMarket.
Use our free eligibility checker tool which will ask a few quicky questions about your finances and what you want the card for.
We’ll then run a ‘soft search’ to find out what cards you are eligible for. This won’t leave a mark on your credit file.
We’ll show you a selection of cards and your chances of being accepted for each, including any that you’re pre-approved to get.
You can then apply in confidence and the credit card provider will let you know whether your application has been successful along with your credit limit.
Other useful guides
Compare credit cards with MoneySuperMarket
With so many credit cards and providers on the market choosing the best one for your needs can feel overwhelming. But that’s where we can help.
Whether you want a cashback card, a card for travelling the world, or one to improve a bad credit score, MoneySuperMarket compares deals from the UK’s leading card providers and banks. We’ll search across the market to find the best deals to suit you.
Then we’ll show you your personalised chance of approval for all credit cards, so you can easily compare your options and apply with confidence. And searching will never harm your credit score.
MoneySuperMarket is a credit broker – this means that we'll show you products offered by lenders. You must be 18 or over and a UK resident.