What is a credit card?

What is the purpose of a credit card?

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A credit card is a type of loan, where the money you spend is actually borrowed from the card provider rather than debited from your personal account.

Person using a credit card

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Credit cards are used for many things: they can be used to make purchases when you might not have the cash ready, to reduce the cost of expensive debt by getting a lower interest rate, and to earn rewards and cashback when you make purchases.

They are essentially a type of loan, which instead of getting cash in your balance, you’ll obtain credit from a lender, such as a bank or building society, which you can spend via a card. Then, the banks add interest onto the amount you’ve spent, unless you clear you balance 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 or building society. The issuer then looks at your credit history to consider your application – and if you have a low credit score you could be refused credit, or perhaps given a less attractive deal on interest rate.

If you have a good credit rating, then you will be accepted and 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 any transactions on your card, plus the amount owing. It also provides details on the minimum payment you need to make (this depends on how much you have your balance) and the payment due date.

Borrow money for nothing

When you purchase something on a credit card, it normally comes with an interest-free period of around 56 days. This means that if you pay the balance in full each month, there will be no interest to pay.

This is one of the main reasons credit cards are used for making big purchases, because you can pay off an item over time, at a low rate of interest – or even interest-free, for a specified period of time.

However, this can be more and will accrue interest quite quickly if you have a high balance on the card, but then you could always transfer the balance on to another card. But always be aware of your limits, because it is easy to fall into deeper debt.

A good way of looking through most cards, including 0% purchase credit cards and 0% balance transfer cards, is to use our Eligibility Checker comparison tool. It’s a free way to see which cards you’re most likely to be accepted for without impacting your credit score.

Top tips for using a credit card

Pay more than the minimum

The problem with a credit card is that if you don’t clear the balance you will be charged interest, and as mentioned this amount will depend on your circumstances and credit score.

At the very least you should aim to pay the minimum payment given on the statement, but really you should try and pay as much as you can afford. If you only make the minimum payments, the debt could take years to pay off.

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 increase should you want to clear your balance by a set date.

Beware of penalty charges

If you miss a payment or even miss the payment deadline, you will typically need to pay a penalty charge. This usually puts a mark on your credit file, but is not as severe as defaulting on a card.

There is also a penalty for exceeding your credit limit, so it is important to be in control of your credit card, and your finances overall, when monitoring your statements. If you do run into problems, contact your card issuer immediately and they may be able to help.

Don’t withdraw cash

You can use your credit card to withdraw cash from an ATM, but it’s not a great idea. There’s usually a fee for cash withdrawals, and it typically comes with a higher rate of interest and no interest-free period. It’s best not to use a credit card for cash.

See our research on the UK’s most dangerous cashpoints.

Card protection

One big reason some people prefer credit cards to cash, is that they feel more secure. For example, 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 if you booked a holiday and the travel firm goes out of business, for example, then 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 – What protection is provided with a credit card?

How to find the best credit card

You don’t have to approach your own bank for a credit card, as 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 Eligibility Checker tool. It doesn’t leave a mark on your credit score and tells you how likely you are to get accepted for a card.

Where to next?

What type of credit card is best for me?

How to get approved for a credit card

Why do I need a credit card? 


*Representative Example: If you spend £1,200 at a purchase interest rate of 19% p.a. (variable) your representative rate will be 19% APR (variable).

All cards subject to status and terms and conditions. Over 18’s, UK residents only.

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