What is a credit card?
A credit card is a card that lets you borrow money to pay for things, up to a set limit, instead of using your own money straight away. You pay the money back later and this is different from a debit card, which only spends money you already have.
How do credit cards work?
Credit cards act like short term loans, giving you financial flexibility and allowing you to make purchases that you would otherwise not be able to make given the timing of your pay cheques.
When you use a credit card, you can spend money you don’t have, and then pay off the balance in a way that suits you.
If you clear the balance in full each month, you won't be charged interest and if you don't, interest is charged on whatever's left owing.
Credit cards – things to know
Credit limits and APR
Every credit card has an APR (annual percentage rate), which sets out how much interest you'll be charged if you don't clear your balance in full. The higher the APR, the more you'll pay to borrow.
You'll also be given a credit limit which is the maximum amount you can borrow on the card. Spend over this and your transaction may be declined. Some cards may also charge an over-limit fee, so it's worth checking your card's terms.
Minimum payments
Every credit card will have a minimum monthly repayment, amounting to a certain proportion of the money you’ve borrowed. The minimum amount will vary depending on the card you use, and will be quoted on your monthly statement.
You should, wherever possible, pay as much as you can each month as if you just stick to the minimum, then you’ll find that you’ll be paying off the balance of your card for a long time as interest continues to accrue.
Fees and charges
As well as interest, credit cards can come with other charges worth knowing about before you apply. These typically include a cash withdrawal fee if you use the card to take out money, a fee for spending abroad or in a foreign currency, a late payment fee if you miss a repayment, and an over-limit fee if you spend more than your credit limit. Some cards also charge an annual fee just for holding the card. Always check a card's terms before applying so there are no surprises later.
How applying affects your credit score
A full application involves a hard credit check, which can leave a temporary mark on your file. Using an eligibility checker first uses a soft search, which doesn't affect your score, so it's worth doing before you apply properly.
Types of credit cards
There are various different types of credit card available to suit the different needs of different customers.
Before you start looking at cards to take out, you should be absolutely clear on the exact reason why you need the card in the first place so that you can pick one accordingly.
Credit builder cards
Credit builder cards, designed for people with poor or limited credit histories, are a popular choice for first time card holders, particularly among young people.
Young people who are likely to have less experience with credit and loans are as a result, likely to have a limited credit history. Since an excellent credit rating is crucial if you want to take out the best credit cards, using a credit building card to improve yours can be a good idea.
These cards typically have lower credit limits and higher APRs so that you can spend and pay off the balance on time without too much difficulty. By keeping up with monthly repayments regularly and promptly over time, you can watch your credit score get better and better, allowing you to take out better credit in the future.
Reward cards
If your credit rating is not an issue, and instead you want to take out a credit card that offers certain perks and rewards for money you spend, then you may want to consider a rewards card.
Some of the most popular reward cards offer points redeemable on international flights for every pound you spend. Often these points can also be redeemed on upgrades on existing flights or on hotel rooms at your chosen destination.
Other reward cards will offer cash back on purchases above a certain amount, or you can consider a cashback card.
0% interest cards
There are also various 0% interest credit cards available that come with introductory periods during which no interest is charged on purchases. As long as you make sure you pay off your balance each month, you’ll be able to spend, interest free, for a while.
It is important to bear in mind though, that when this 0% introductory period ends, the interest rates charged on these cards will be very high. It is, therefore, crucial that you shop around for a new card a few weeks before the period ends.
Am I eligible for a credit card?
Whether you'll be accepted for a particular card usually comes down to a few things:
Your age - most providers won't lend to anyone under 18.
Where you live - you'll typically need to be a UK resident to apply for a UK credit card.
Your income - many providers set a minimum income threshold, and your employment status may also be taken into account.
Your financial history - including things like County Court Judgments.
Your credit history - often the biggest factor, and the reason credit builder cards exist for people with little or no credit history.
It's worth checking your eligibility before you apply. A full application involves a hard search which is recorded on your credit file, and several rejections in a short space of time can make it harder to be accepted for anything else.
Credit card vs debit card
Below we’ve outlined the differences between credit cards and debit cards
Credit card | Debit card | |
How it works | You borrow money and repay it later | You spend money you already have |
Interest | Charged if you don't clear the balance in full | Not charged (though overdrafts may be) |
Credit score | Can help build it up with responsible use | Doesn't affect your credit score |
Purchase protection | Section 75 can cover some eligible purchases between £100 and £30,000 | No equivalent protection |
How to apply for your first credit card
Use an eligibility checker first. This shows you which cards you're more likely to be accepted for, without leaving a mark on your credit file.
Compare your options with Money Expert. Look at the APR, any 0% introductory period, and the credit limit on offer, and weigh these against what you actually plan to use the card for.
Apply and set up a Direct Debit. Once you're accepted, set up a Direct Debit for at least the minimum payment, so you never miss one by accident.
Alternatives to a credit card
A credit card isn't the only way to manage spending or borrow money — it's worth considering whether it's the right fit before applying.
Debit card - if you don't need to borrow, a debit card (which comes with any current account) avoids interest and credit checks altogether.
Arranged overdraft - useful for a one-off purchase you know you can pay back quickly; check the rate first, as unarranged overdraft interest can be very high.
Personal loan - for larger, planned borrowing, a personal loan can offer a lower interest rate than a credit card, though it's less flexible.