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Last updated: 01/09/2020 | Estimated Reading Time: 4 minutes

Credit cards - how do they work?

Many people are daunted by the idea of getting a credit card, with many believing them to be risky and complicated. There are a great deal of terms and conditions to take into consideration which often put people off credit cards. There are also people who rush too hastily into taking out a credit card. People who don't fully understand what they are getting into or how to deal with the commitment that they are making. Once you understand exactly what having a credit card entails, it is easy to make sure that you can cope with the responsibility of owning one. Used correctly, credit cards can actually help you to improve your financial situation.

In This Guide:

Credit cards - how do they work?

Many people are daunted by the idea of getting a credit card, with many believing them to be risky and complicated. There are a great deal of terms and conditions to take into consideration which often put people off credit cards.

There are also people who rush too hastily into taking out a credit card. People who don't fully understand what they are getting into or how to deal with the commitment that they are making.

Once you understand exactly what having a credit card entails, it is easy to make sure that you can cope with the responsibility of owning one. Used correctly, credit cards can actually help you to improve your financial situation.

How much do credit cards cost?

The main cost of credit cards is the interest that you are charged for the money that you borrow. If you were to borrow £1,000 on your credit card and the interest that you are charged is 10%, the loan will have cost you £100.

One thing to bear in mind however is the fact that this interest is worked out over the course of a year. It is for this reason that it is referred to as APR (Annualised Percentage Rate). This means that you only have to pay £100 if it takes you an entire 12 months to pay it back.

If you are paying back on a monthly basis, then it will only cost you one twelfth of the APR. This means that if you were to borrow £1000 and pay it off in a month, you would only be charged 0.83% interest. This would translate to a cost of £8.30 if you pay back the £1000 in full in that month.

How to get a credit card

To be eligible for a credit card you must be over 18 and live in the UK. You must also be on a certain yearly income, typically over £10,000. Individual credit card companies will have their own application criteria and you will therefore need to check if you have a specific credit card in mind.

Check Your Credit Rating

Before you apply for a credit card you should first try and establish what your credit score is. This is probably the most important factor that any lender will consider before allowing you to take out a loan or a credit card. It is important to find this out first because if you end up getting rejected for the card, it will negatively impact your credit score.

Compare Credit Cards

There are a lot of different types of credit card out there so it is important that you look into them properly before you decide upon one. Some of them offer better interest rates, lower fees, better cashback options and so on.

Make an Application

Once you've decided upon which credit card you would like to opt for, it's time to actually apply for a card. You can either get yourself a paper application from your bank or you can do it via an online form. Normally you will find out straight away if you have been accepted by the bank but this can take slightly longer.

Budget for your monthly repayments

One thing that is absolutely vital is that you make sure that you can afford to meet your repayments. Normally you only have to pay back a minimum of £5 a month or a set percentage of your debt, however certain cards require you to pay back your debt in full each month. Failing to make repayments can mean that you are charged late fees or could see your credit rating affected.