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
Credit cards are plastic cards, you can use to make payments, similar to a debit card. Credit cards and how they work can be quite tricky to understand. But once you understand the basics of how credit cards work, you can figure out how to choose the best one for you.
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.
What are the benefits of credit cards?
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.
Am I eligible for a credit card?
To be accepted for a credit card, you’ll need to meet the lender’s eligibility criteria. These factors will be individual to each lender – but typically they will usually include:
Age: The typical age requirement for credit cards is 18 and over.
Income: Lenders will usually want you to be employed and earning a minimum amount each year. This minimum threshold usually beginsat£7,500 a year and can go up to considerably more depending on the card.
Financial history: The majority of lenders will be reluctant to lend if you’ve been bankrupt or you have County Court Judgements (CCJ) against you.
Credit score: Lenders will also base their decision on your credit file and credit score. They’ll use your credit score to determine if it’s likely you’ll make your repayments. Your credit file and credit rating will show how you’ve managed credit in the past.
It used to be that to find out if you were eligible for a credit card, you’d need to apply directly to the lender. The problem is having a lot of rejected applications can harm your credit score. To avoid this issue, you can use our eligibility checker to find out what credit cards you may be eligible for. This will do a ‘soft search’ on you – so we can let you know which card deals you’re likely to be accepted for – and it doesn’t affect your credit score in any way.
How do I apply for a credit card?
After you’ve decided on the type of card you want, you will need to provide information for your credit card application.
You’ll need to tell the lender your personal details, such as your name and date of birth. Lenders will need to know your current address and any previous addresses for the last three years. You will also have to tell lenders your income and job status, so lenders know you’ll be able to make your repayments.
After finding out your eligibility, you can then choose the card most suited to your needs. If your credit card application is successful, you should receive your card.
What are the different types of credit card?
Purchase credit card. Designed to be used for shopping, you pay 0% interest on purchases for a set period, for example, three months
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 a credit score?
Your credit score is an indication of how creditworthy you are – and how reliably you can repay what you borrow – and it will dictate whether they’ll give you a credit card and what interest rate 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.
What's 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 credit card accounts that you no longer use it can be a good idea to cancel 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 one of the most important factors lenders consider. It gives them an idea of how trustworthy you are with credit and how likely you are to make repayments on time
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:
Compare credit cards with MoneySuperMarket
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, length of interest-free period and your chances of being approved, before making a final decision. That way you can apply with greater confidence.
MoneySuperMarket is a credit broker not a lender. You must be 18 or over and a UK resident.