How do Credit Cards work in the UK?
Written by Robert Bester, Consumer Finance Expert Robert has been a writer for six years, specialising in consumer finance and the UK lending market. Concentrating on consumer credit products, Robert writes informative articles that help customers manage their personal finances efficiently.
20th September 2021
6 minute read
If you are planning on using a credit card in the UK, you may want to take a few things into consideration before applying for one, or even using it to make contactless purchases in retail shops, bars, restaurants, supermarkets or even online.
With many different types of credit card, it’s worth understanding which one you have and how it works when it comes to making purchases, the minimum monthly payment, transfers, your limit and what sort of fees need to be paid.
Keep reading to find out how credit cards work in the UK and what you may want to know about your card before you start using it, just so you aren’t caught out by fees or charges.
How do credit cards work?
A credit card works in the same way as a debit card in that you make purchases on it, but it differs in that rather than spending money you have already, you are adding to a balance that will increase, indicating how much needs to be repaid.
Simply put, spending on a credit card is spending money you don’t have, that you will have to repay at a later date, as per the terms of the card. You will usually be required to make a minimum monthly payment to reduce the balance, along with any interest that you may have accrued.
There are different types of credit cards that all have different perks, so it may be worth familiarising yourself with them before you start your search:
They all have different purposes so it might already be clear what type of credit card you would want to apply for. For example, a Purchase credit card may be ideal if you just want to buy things, whereas a travel credit card may be a better option if you want to buy things while on holiday.
Next, we look at the lifecycle of a credit card from beginning to end.
Lifecycle of a credit card
- Decide on the right type of card for you
- Check your eligibility (try MoneyMatcher for FREE here)
- Apply for a Credit Card
- Spend on the credit card (you will have a limit that you will have to stay within)
- Make a minimum payment every month (Remember - the more you pay off, the less interest you will have to pay overall)
- Reduce balance to zero and cancel credit card OR keep to spend more in the future (terms of credit card will dictate whether you decide to cancel it or keep it)
Benefits of a credit card
There are various benefits to having a credit card, depending on the type of credit card you have and what the terms are. They may include:
- Spread the cost of purchases – a credit card will ultimately allow you to spread the cost of purchases so you don’t have to pay for them all at once. Depending on the type of card you have, you could avoid paying interest and pay for the full amount at your own pace. The most suitable card for you here is a 0% Purchase Credit Card
- Transfer an existing balance or debt – if you have an existing credit card or loan that you would like to pay no interest on for a little while longer, then you could transfer it to your card. The most suitable card for you here is a 0% Balance Transfer Credit Card
- Protect your purchases with Section 75 – another unsung advantage of having a credit card is that it gives you extra protection when making purchases. In a nutshell, if you are unable to get a refund through a retailer, you could alternatively get a refund through your credit card company instead. This helps you avoid being stung by returns policies or companies going into administration
- Earn rewards, air miles and points – with certain credit cards you may be able to earn rewards for spending, such as discounts, supermarket points and air miles for travelling overseas. Take a look at which rewards scheme would be the best for you, ideally saving you money in the process. The most suitable credit card for you here is a Rewards Credit Card
- Build your credit score – you could also use a credit card to make improvements to your credit score, simply by using it and paying off the balance every month. This could be ideal for those wanting to access better interest rates or products in the future. The most suitable credit card for you here is a Credit Builder Credit Card
What to watch out for with credit cards
As much as a credit card can be a useful addition to your spending, if not managed correctly you could end up in financial difficulty. Things to consider include:
- Always make your minimum repayment – most credit cards will have a minimum payment that you must make on time. Failing to pay or making a late payment could lead to extra charges or could reduce your credit score. Creating a standing order or direct debit will make sure you never forget
- Avoid if you’ve had issues in the past – if you have had an issue with a credit card before or have existing debts that you currently need to pay off, then getting a credit card may not be ideal. Spending more money that is not yours could get you into further debt and make financial distress even worse
- Be aware of your credit limit – once you are given a credit limit you must always stay within it, or you may have to pay charges for overspending. Check your balance frequently and remember whatever you spend will all have to be repaid eventually
- Keep interest to a minimum and avoid fees and charges – a credit card could enable you to manage your spending and pay off purchases at your own pace. That means avoiding extra charges or interest by paying off your balance promptly and ideally, paying no interest at all
How do credit card payments work?
- Credit cards could enable you to spread the cost of the remaining balance and eventually, pay it off completely
- You will have to make a minimum monthly payment every single month, but you could pay more if you would like to reduce your balance quicker
- You could also avoid being charged interest by spending on your credit card and paying off the amount before the end of the month
- Always make sure you have enough to cover your credit card payments and make a plan to pay it off as soon as possible if you are being charged interest on top
How do credit card fees and charges work?
Your credit card will come with a set of terms (you can find this in your summary box) that will outline what benefits you will receive along with the interest rate and the circumstances where you might incur fees or charges. They could include charges such as:
- Failing to make a monthly payment or paying it late
- Spending above your credit card limit without permission
- Making a purchase in another country outside of the UK
- Making a balance transfer
- Making a cash withdrawal from an ATM
To avoid these additional charges, you should read your summary box thoroughly and understand how you can use your card without incurring extra fees along the way.
How do credit card interest rates work?
With every type of credit card, you will receive an associated interest rate that will appear as an APR (Annual Percentage Rate), indicating how much you are likely to pay in interest over the course of a year.
Usually, you will accrue interest on your outstanding balance every month, but this could be avoided depending on what type of credit card you have, or how you manage it:
- 0% interest credit cards – a Purchase credit card will often have an introductory offer period where you will actually have an interest rate of 0%, meaning you may not have to pay anything on top of your spending. However, this will only last for a limited time, before it reverts to the standard APR. Once your introductory period has ended, it might be time to move onto another credit card, to get another new period of 0% interest
- Pay off your credit card before the end of the month – it could be that your spending is minimal and you can pay off your balance before the end of the month. If you can do this every month, you may be able to avoid any additional interest
Remember, if at all possible, you should always aim to pay little to no interest at all. This can be achieved from picking the right credit card for you and careful management of your finances.
Start your comparison journey today and use the link below to check your eligibility for a credit card using our FREE online tool, MoneyMatcher.