How do credit cards work & which one should I get?

Credit cards can be a convenient way to make purchases and spread your costs, but you need to know how they work and what your best options are before applying for one.

If you don’t use them correctly, interest payments can be costly.

How do credit cards work? 

There are various credit cards on the market that are ideal for different purposes and have a pre-agreed credit limit. 

You’ll be charged for any spending at a specific interest rate, but you may not incur interest if you pay off your account balance each month or if you’re offered a 0% rate for a set period of time. 

Provided you always pay your debts on time and keep within your limit, a credit card can be useful and help you build up your credit score, helping you access competitive loans and mortgages. 

So, which credit card is right for you? 

What are the different types of credit cards?

Finding the right credit card is important as you should choose one that meets your needs. 

We’ll reveal the different types and what they are used for.  

Purchase credit cards 

When you want to pay for expensive items such as holiday flights or a sofa, a 0% interest purchase credit card can be a good solution. 

You’ll get interest-free spending for a fixed period, helping you spread the cost without incurring any interest. 

It’s worth looking into cards with the longest interest-free periods, although you’ll need a good credit score to qualify for the best cards.  

Another advantage of using a credit card is that you get purchase protection if you spend a certain amount, thanks to Section 75 of the Consumer Credit Act.

So, if anything goes wrong with something you’ve bought using your credit card, you should be able to claim your money back. 

Balance transfer cards

Balance transfer cards can help cut the cost of existing debt.

You can transfer a balance from an existing credit card to a balance transfer one, which offers long interest-free periods to help you pay off your debt. 

These cards may have a ‘balance transfer fee,’ which is typically a percentage of the amount you plan to transfer. Some credit cards don’t have this fee, but usually offer shorter interest-free periods.  

Credit builder credit cards

These credit cards can boost your credit rating, helping you access better deals if you need to borrow in the future.

So, it can be useful if you have a low credit score or limited credit history. 

Credit builder cards often have higher interest rates and lower credit limits.  

Reward and cashback credit cards

Reward credit cards offer benefits when you spend, so you may be able to accumulate points that you can use for money off your supermarket shop.

One downside is that you may be limited to getting rewards from a specific retailer.  

Cashback credit cards offer you money back when you spend with the card, and you can get extra cash when you spend over a certain amount, but these tend to have high annual fees and interest rates. 

Both credit cards usually do not offer 0% interest-free periods, so paying back in full every month is vital. 

Eligibility for credit cards

Credit card providers will examine your financial status and credit report before deciding whether you’re eligible.

If you’ve always kept up with payments on existing loans, your mortgage or other credit cards, you’ll have a better chance of qualifying.  

How do I apply for a credit card? 

Firstly, decide which kind of credit card suits your needs and use an eligibility checker to see whether you’ll be accepted without impacting your credit score.  

Then make sure you’ve got all the information that any lender will ask for, including personal details such as your address, income, outgoings, bank account and contact details. 

Fill out and submit an online application with your chosen lender, and if you’re accepted, you’ll receive your credit card through the post. 

The advantages and disadvantages of a credit card

The advantages of having a credit card include: 

• Convenience as you can buy something now and pay back later 
• Spreading the cost of purchases 

• Interest-free borrowing 
• Purchase protection 
• Potentially boosting your credit score 

Some disadvantages include: 

• High interest rates (outside of 0% interest periods) 
• The risk of getting into debt if you don’t keep up with regular payments 
• The temptation to spend money you don’t have 
• High charges for cash withdrawals, exceeding credit limits or missed payments 

The right credit card can help you spread your payments on expensive items, but it’s vital to choose the right one for your circumstances.