Back to basics: All you need to know about credit cards

A credit card can be the ideal way to spread the cost of a major purchase, pay off debt and, if you play your cards right, you won’t have to pay a penny in interest. Here, we explain everything you need to know about credit cards…

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How do credit cards work?

A credit card is a plastic payment card which you use to borrow money to pay for goods and services. Unlike a debit card, where money is taken directly from your current account, anything you pay for using a credit card will be added onto your card’s balance. Ideally you should pay off this balance every month when your bill comes through but if you can’t, the card provider will still insist you repay a stated minimum.

What are the advantages of using a credit card over a debit card?

As well as being able to spread the cost of purchases, the biggest advantage that credit cards have over debit cards is the financial protection they offer in the event something goes wrong. Under a combination of the Consumer Credit Act and Consumer Credit Directive, if you use your card to buy something that costs between £100 and £60,260 and it turns out to be faulty or the company goes bust, you can get your money back from the card provider.

How much interest will I pay?

That all depends on the type of card you choose. There are lots of different kinds of credit cards available, which all cater for different requirements, so it’s important you choose the right one to suit your needs.

Are there any charges to pay?

Again this depends on which card you go for. Cards which come with added extras, such as concierge services or travel insurance, have an annual fee, so make sure you read the small print carefully before applying.

But all credit cards will impose a late payment charge if you fail to repay what you owe every month – as well one-off fees (and higher interest) for using your card to withdraw cash from an ATM.

Most credit cards also charge fees for use overseas. If you want a card specifically to use when you’re away on holiday, then check out the cards which are designed for overseas spending.

How much do I have to repay each month?

Each card provider will set down a minimum amount you have to repay each month, which is typically 1% of the balance (plus interest) or £5, whichever is the greater. However, never just make the monthly repayment as it could take years to pay off your balance. Try and repay as much as you can every month to reduce the overall amount of interest you pay.

What are 0% purchase credit cards?

Some cards come with a set 0% introductory rate on purchases, during which time you won’t pay any interest on your spending. But make sure you clear your credit card balance within this period though, otherwise you’ll have to start paying interest on what you owe – and most cards come with an high annual percentage rate (APR) of around 18%. Compare the best 0% cards for purchases here.

What if I know I won’t be able to repay what I owe during the introductory period?

Then your best bet could be to consider a card with one consistently low rate of interest. Most low rate cards have APRs that are almost half those charged by standard cards. Compare low rate cards here.

How can I reduce the amount of interest I’m paying on my current credit card balance?

If you’ve already got a balance on a credit card and you’re paying a high rate of interest, you should move your debt as soon as possible to a card offering a 0% rate on balance transfers. (This will have to be from a card from a different provider as the purpose of these deals is for credit card companies to get new custom).

Some cards offer 0% introductory rates for more than two years, enabling you to clear your debt during that time without paying interest. Don’t use a balance transfer card for spending though, as you’ll usually be charged a high rate of interest on all new purchases. Compare 0% balance transfer cards here.

Are there fees to pay when I transfer a balance?

If you want to access a 0% shelter for your existing debt, you’ll have to pay a fee so it’s important to do your sums and check how much of an impact this will have. Balance transfer fees are typically around 3% of the amount you are transferring, which soon add up for larger amounts.

There are balance transfer cards available with lower fees than that if you want to keep costs down, but bear in mind they come with shorter 0% shelters. Compare low fee balance transfer cards here.

Can I be rewarded for clearing my balance every month?

In all cases, credit cards work best if you don’t carry debt on them – and this means clearing your balance every month.  You can do this efficiently by setting up a direct debit with your card provider, which will automatically pay off the exact amount you have spent.

Cashback credit cards, which are designed for those who clear their balance every month, pay back a certain percentage of what you spend which is usually applied to your account annually. Compare cashback credit cards here. Alternatively you can receive rewards such as Avios (formerly air miles) or loyalty points in supermarkets. Compare reward credit cards here.

Paying off your balance each month is not a condition of these cards but, if you don’t, the high interest they charge will almost certainly outweigh the rewards.

Can I still get a credit card if I’ve got a poor credit history?

Yes you can. Although you will be unlikely to qualify for a standard credit card, there are cards specifically designed for those whose credit scores are not up to scratch. Bear in mind that credit limits for this kind of card tend to be low and you must try and pay off your balance in full every month, as related APRs tend to be exceptionally high to reflect the increased risk.

The good news though is, used responsibly card for bad credit can actually help you restore your credit score. Compare cards for bad credit here.

Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct

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