Credit cards can seem confusing. There are so many out there, all marketed for various purposes and with a dizzying array of offers, rates, and rewards. It’s no wonder it can be overwhelming if you’re trying to figure out whether you should take out a credit card. So, to make things easier, we’re going to explore exactly what you need to know about credit cards.
What is a Credit Card?
First things first. A credit card is a card that you can use to pay for things or withdraw money, using borrowed funds. It can be used to buy goods and services if the company accepts your type of credit card.
Credit cards are provided by banks or other financial institutions, and you’ll be expected to pay back your borrowed funds each month, either as a minimum payment, or in full. If you choose to pay back just the minimum, you’ll normally also have to pay interest on any amount you carry over to the next month. Some credit cards also come with offers such as cashback, free balance transfers or loyalty points at certain stores.
Just like loans or its alternative, credit cards are a form of credit (or lending), so to be accepted when applying for one, you’ll need to go through a credit check. Lenders in the UK should be fully regulated by the Financial Conduct Authority and are required to carry out these checks to make sure you can afford the repayments and responsibly manage your finances. The lender will look at your credit score, as well as other factors, to determine how risky you’re likely to be as a borrower.
How do Credit Card Interest Rates Work?
Credit cards come with different interest rates and the rate you get will depend on the lender and your circumstances. Often, the higher your credit score, the better rate of interest you’ll be given. If you have a good credit score, you might also be able to choose from a wider range of credit cards with various offers, compared to someone who has a poor credit history.
If you’re wondering how interest is charged on a credit card, the good news is that if you pay your credit card bill on time and in full, you won’t be charged any interest at all. So, it will only cost you the amount you borrowed. But, if you pay less than the full amount of your credit card bill, or only the minimum required, you’ll be charged interest daily.
If you use your credit card to make cash withdrawals, you might also face a higher interest rate, plus fees on top. So, it’s worth bearing this in mind if you’re looking to take out a credit card.
Can I Get an Interest Free Credit Card?
Some lenders offer 0% interest credit cards. These types of credit cards offer interest-free on purchases for a limited period, usually up to two years (or less if you have a poorer credit history). Many customers use 0% interest cards for large, one-off purchases when they have a proper budget and plan in place to pay back the credit. This is because it can be a cheaper way to borrow money.
However, if you continue to use your credit card for multiple purchases and fail to pay back the full amount at the end of the interest-free term, it can lead to an accumulation of debt, just like any other type of credit.
How Much Can You Spend on a Credit Card?
When you’re approved for a credit card, you’ll be given a limit by your provider. This is the maximum amount that you can spend on your credit card overall. Once you pay some of this back, your limit will rise accordingly. If you’re wondering how credit card payments work, look at this example:
Say you have a £1,000 limit and spend £250 in one month. That will leave you with £750 of your limit left until you pay it back. If you choose to pay only a portion of the credit back the following month, for example £50, your available credit limit will now be £800.
However, this doesn’t take into account any interest added, depending on the terms of your credit card. It can be difficult to work out the interest on a credit card as it’s calculated using your APR (annual percentage rate), your averaged daily balance, and the days in the month since your last statement. But your credit card statement should clearly show any interest charges and your current rates.
If you try and spend over your credit limit, you could be charged a fee, or the attempted payment might be rejected. This might also harm your chances of taking out further credit, especially if it happens regularly.
The credit card limit that you’re likely to be offered will be determined by a number of factors. These are generally:
- Your credit history
- Your income
- Your monthly spending
- Any credit you have already
- Any debt that you owe
The better your credit history, and the less that you owe across current debts, the better your chances of being given a higher credit card limit. With some credit card providers, if you can show that you’re responsible in managing your payments over a period, you might be able to increase your limit.
What is a Credit Card Statement?
When you take out a credit card, you’ll get a document detailing your transactions and balance each month, either as a paper copy or as an online, digital statement. Your credit card statement will normally include:
- Details of any transactions (purchases, cash withdrawals etc)
- Your balance and available credit
- Your minimum monthly repayment and when it’s due
- Any interest that’s been charged
- Any added fees
- Updates to any terms or conditions
It’s a good idea to properly check your credit card statements each month to make sure all the transactions are correct and that you can manage your repayments. If there is anything that doesn’t add up or that you think could be a fraudulent purchase, you’ll need to contact your bank straight away and report any potential crime.
Key Tips on Using a Credit Card
Like most loans or forms of borrowing, if managed properly and used sensibly, a credit card can be helpful. And it can be a cheap way of borrowing, especially if used for a specific purchase, rather than just day-to-day expenses.
If you’re taking out a credit card, or thinking about getting one, it’s worth following these tips:
- Shop around to get the best deal and rates, even if you have a poor credit history
- Get clued up on your interest rate, any fees you’re likely to be charged, and any offers available
- Know your credit card limit, don’t exceed it, and try and stick well below it, if possible
- Take the time to go over your credit card statements each month
- Pay off your balance in full each month if it’s feasible
- If you can’t pay in full, pay more than the minimum to lower your overall interest and repayment amount
- Refrain from taking out multiple credit cards at one time
If you’re looking to borrow money to cover immediate or urgent expenses but taking out a credit card is not for you, there are other options you can consider, such as a short-term loan or a credit line.
Disclaimer: We are not providing financial advice. These are just tips for informational purposes. You should read carefully about the credit card provider’s T&C’s before taking out one as they might differ from each other. Also, we are not affiliated to any of the external parties linked, they are provided for reference only.
