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What is a credit card?

Credit cards explained: understanding the basics

A credit card is a type of loan where the money you spend is borrowed from the card provider rather than taken from your bank account

By Tim Heming

Published: 14 June 2021

Person using a credit card

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What is a credit card?

A credit card is a card that allows you to borrow money to pay for goods and services with the promise that you’ll repay the card provider what you owe at a future date, typically with interest added. 

Credit card providers will set a limit on the amount you can borrow and have fixed rules for paying off the debt – normally a minimum amount each month. 

You can face high interest rates if you don’t clear your outstanding balance each month. But some cards offer a 0% interest rate in the first months for new customers - to attract new sign-ups.

As well as making purchases, credit cards have other benefits. They can be used to consolidate debts, earn rewards and cashback and even boost your credit rating, which can help with future borrowing.

Credit cards are issued by a bank, building society, or other type of credit lender and typically arrive through the post as plastic cards that fit neatly in your wallet or purse. Increasingly people hold them in ‘digital wallets’ allowing them to be used through their smartphone for payments. 

Why should I get a credit card?

Here are some of the advantages of credit cards:

Emergency purchases. Credit cards can be particularly useful if you need to make an unexpected payment and you won’t have the funds until payday. For example, your boiler breaks down in winter and you need to get it fixed immediately. You can put the bill on a credit card and then pay it off later.

Spread the cost of a purchase. Some credit cards have introductory offers where you don’t pay any interest on the amount you borrow for the first few months. This can allow you to make an expensive purchase upfront and then spread the cost of repayment over the following months. It’s important to pay off what you owe on the card by the time the interest-free period ends though. This is because after the 0% introductory offer rate the interest rate will jump up to a much higher standard rate.

Consolidate debt. If you owe money in different places and at high interest rates, it can be easier and cheaper to pay it off with a credit card and then have just one debt to manage. Specialist credit cards called balance transfer cards enable you to move what you owe to a new card with a very low or even 0% interest rate for a period of time – sometimes 12 months or more. There is usually a one-off balance transfer fee. But doing a balance transfer can buy you time to clear the debt without incurring interest.

Protection on payments. Credit cards offer you financial protection on purchases you make between £100 and £30,000 under the Consumer Credit Agreement. The law holds the credit card provider equally liable if anything goes wrong with your purchase. For example, this could include if the supplier of the goods or services goes bust and your goods aren’t delivered. Read more about how this works with our guide to credit card protection.

Earning rewards. Some credit cards allow you to accrue rewards or loyalty points with every purchase. If you clear your balance in full every month, a rewards credit card can be a smart way of making plastic work in your favour.

Building your credit score. If your credit score is low it can be hard to get credit. It may be that you’ve missed repayments in the past or perhaps you’ve never borrowed you have no financial footprint or credit history. A credit builder credit card is a card that lets you borrow small amounts and build up your credit rating over time. Used responsibly, it can help to improve your credit score and get better credit deals in the future. A recent consumer survey by MoneySuperMarket found 29% of young people took out a credit card or loan to start to build up their credit history.

What is a balance transfer card?

balance transfer card is a way of consolidating your debt, giving you the chance to pay it off over time at a low or 0% interest rate.

It’s the same as a regular credit card but isn’t designed for spending. Instead, the idea is that you can move an existing debt – such as a loan or another credit card balance – on to the balance transfer card at 0% interest, and then pay it off. 

You are likely to have to pay a one-off balance transfer fee, which will be a percentage of the balance you transfer on to the card, typically around 2% to 3%. You should also make sure you clear the debt before the interest-free period runs out, otherwise you’ll face a much higher interest rate or APR.

What are the other types of credit cards?

  • Credit builder card. Helps those with a low credit score build their credit rating by showing they can borrow responsibly. Credit builder credit cards typically have lower borrowing limits and higher interest rates

  • Money transfer credit card. Allows you to take money from your credit card as cash for a set period without paying interest. For example, you could use it to give yourself a cash loan or clear an existing bank overdraft

  • Rewards credit card. These offer rewards and loyalty points – such as cashback and airmiles – as you spend. Rewards vouchers can often be redeemed with a variety of retailers

  • Overseas cards. Ideal for use abroad, a travel credit card means you’ll be able to use it overseas without incurring a fee. Most standard credit cards have high fees and interest for overseas use. A travel credit card can help you to manage your holiday spending as you won’t have to worry about running out of cash or carrying large amounts of currency

What is the difference between a credit card and a debit card?

The main difference between a credit card and a debit card is that with a credit card you are borrowing money from the card provider when you spend. It sits as a debt on your card until you pay it off. In contrast, a debit card allows you to spend your own cash direct from your bank account. Although if you have an overdraft facility on your current account – you are also effectively borrowing from the bank when you go into your overdraft.

Both credit cards and debit cards look the same. They have 16-digit card numbers, expiration dates, and personal identification number (PIN) codes.

Should I apply for a credit card?

Before you apply for a credit card, you should consider the following:

  • Existing debt: If you have other card and loan borrowing see if you can pay off some of it first. This is because existing debt can indicate stretched finances to lenders, who might be put off lending to you as you will appear to be a high risk applicant

  • Open accounts: If you have open unused credit accounts it can be a good idea to close these, as otherwise lenders may think you will struggle to settle your outstanding balances

  • The application form: Before you submit your application you should make sure all the details are correct, as even a small mistake can lead to your application being refused. If you’re turned down for credit it’s best to wait some time before applying again. This is because making too many applications in a short space of time can make you look like a high risk borrower

  • Your credit history: Your credit history is arguably the most important factor lenders consider. It gives them an idea of how trustworthy you are with credit and how likely you are to make the repayments on time 

What is a credit score?

Your credit score is an indication of how much faith a lender has that you’ll repay what you borrow – and it will dictate their appetite to give you a credit card and what interest rates to set. It is easy to get hold of your credit record online and see your score.

Your credit score is calculated by looking at your financial history and how you’ve handled credit in the past. If you have a low credit score you may not be able to get the best interest rates on your credit card or be able to borrow as much money. In some cases, the credit card provider may not accept your application. 

Read more about how lenders and credit reference agencies work and tips on how to improve your score with our guide to your credit score.

Other useful guides

We have a range of helpful guides if you’re looking to get your first credit card, want to know a bit more about how they work or how to apply:

Getting your first credit card

How to apply for a credit card

Can I get a credit card?

Easy to get credit cards

Compare credit cards

If you’re looking for a credit card it’s quick and easy to compare with MoneySuperMarket. 

Our Eligibility Checker tool shows you the cards you’re most likely to be approved for by doing a ‘soft’ credit search, which won’t affect your credit score. 

You'll be shown a range of credit cards, which you'll be able to sort according to features such as interest rate, interest-free periods and your chances of being approved, before making a final decision. 

MoneySuperMarket is a credit broker not a lender. You must be 18 or over and a UK resident.