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Our guide to how credit cards work

Credit cards can be an easy and convenient way to spread the cost of a one-off purchase or for everyday expenses like online shopping or groceries.

Credit cards can help you to budget and spread your payments. But they do require careful management to make sure you don’t end up in financial difficulty.

Here’s our guide on what a credit card is, how they work, and how to get one.

a customer smiling and handing over a credit card

What is a credit card?

A credit card is a type of loan, where the money you spend is borrowed from a financial provider, rather than coming out of your own bank account.

You’ll receive a physical card that works much like a debit or bank card. You can use it to make payments in person and online. You may also be able to add your credit cards to your mobile devices so you can use them to make contactless transactions.

How do credit cards work?

Credit cards usually have a spending limit. You can spend as much or as little as you like within that limit. Then you can pay back the full amount at the end of each month, or simply pay off the minimum amount of your balance monthly. Any balance you don’t clear will accrue interest at the rate or rates your provider set out when you applied for the card, which may change over time.

Would a credit card work for me?

If you’re thinking about getting a credit card, whether for the first time or in addition to cards you already have, it’s a good idea to check your finances. Particularly consider any debts you may currently have. If you already struggle with managing your money or you think you might be tempted to overspend, it’s important to weigh up all borrowing options alongside getting a credit card.

Find out if a credit card could work for you

What type of credit cards are available?

  • Balance transfer cards – these enable you to move an existing credit card balance to a new card often with a lower interest rate for a fixed period. However, there are some restrictions so you will need to check with your provider. For instance, the Post Office Classic Credit Card offers 0% on balance transfers for up to 12 months* (2.9% transfer fee), depending on eligibility
  • Travel credit cards – these can offer all kinds of rewards – air miles, cashback on purchases, or store points. The rewards can be worth it, but fees can also be higher than on regular credit cards
  • Credit builder cards – these types of cards allow you to build up your credit report and demonstrate that you’re a good borrower. This can be particularly helpful if you have a poor or limited credit history. Credit-builder cards work in the same way as regular credit cards, but you’re likely to be given a lower credit limit and interest rates may be higher. As long as you pay the balance off at the end of each month your credit score should rise over time
  • Reward cards – these can offer all kinds of rewards – air miles, cashback on purchases, store points or money-off deals. The rewards can be worth it, but fees can also be higher than on regular credit cards
  • Money transfer cards – these are similar to balance transfer cards, but money from the card is moved into your bank account
  • Purchase cards – these are generally designed for shopping or one-off purchases and can come with low or 0% interest introductory rates, helping you to make purchases now and pay them off later. For instance, the Post Office Classic Card offers 0% on purchases for up to 12 months*, depending on eligibility

Not all providers will offer all of these types of cards, so it’s important to research a range to identify the card and features that will best meet your needs.

* Assuming a credit limit of £1,200 and an interest rate on purchases of 34.94% p.a. variable, you will receive a 34.9% APR representative variable. Fees and terms are subject to your individual circumstances and may differ from those displayed. Post Office Ltd (credit broker); Capital One (exclusive lender).

What are the benefits of having a credit card?

  • Easy to carry and use – credit cards are globally accepted and in some cases things like accommodation and car rental can be much easier to book with credit rather than debit cards
  • They can help you improve your credit score – this is given to you by a lender when you apply for a credit card. It’s determined by your credit history and how well you’ve repaid loans in the past. The higher the score, the better your chance of getting a card. Not managing your card responsibly could have the opposite effect and harm your credit score
  • They are safer than carrying cash – if your card is lost or stolen, you can contact your lender to cancel the card. If it’s used fraudulently, you may have a better chance of getting your money refunded
  • They can help you manage large payments – if you’re planning a big purchase like a new car or home improvement, a credit card can help you spread the costs
  • They can be cheaper than taking out a loan – many loans come with high monthly repayment fees. Some credit cards come with an initial interest-free period, helping you to budget your spending
  • You’re protected – with credit cards, some purchases are protected. Credit cards can offer financial protection under Section 75 of the Consumer Credit Act 1974. If you buy something between £100 and £30,000 with your credit card and something goes wrong, you may be able to make a claim to either the supplier or your credit card provider. For instance, if you book a holiday and the provider goes out of business. This applies even if you only paid an initial deposit on the card

What are the downsides of credit cards?

  • High-interest payments – if you don’t clear your balance at the end of each month, and you’re out of a 0% fixed period, you’ll have to pay interest on your outstanding balance. These charges can be more than other forms of borrowing
  • Danger of debt – if you miss just one payment the interest can start to mount up. Unless you pay off what’s owed each month, you can quickly get into debt, especially if you continue spending on your card. If you have credit cards and are concerned about overspending on them, read our guide to managing this debt
  • Damage to your credit score – if you miss a payment or go over your credit limit it can lead to a poor credit score. This could affect your ability to borrow money in the future
  • Additional fees – as well as interest, you could find yourself paying extra fees or penalties for exceeding your credit limit or missing a payment. You’ll usually have to pay a higher rate of interest for withdrawing cash and some credit cards may also charge an annual or monthly fee
  • Expensive to use abroad – although this depends on the type of card you have. Overseas cards are designed for travellers, but others can carry higher fees when used in another country. This depends on whether you use the card for purchases or cash withdrawals. Shop around to find the best rate cards to use abroad

How do I apply for a credit card?

If you're happy that you can manage the finances of having a credit card, a useful first stop is to use an eligibility checker. Such tools help you find cards you’re likely to be accepted for without running background checks that impact your credit score.

Once you’ve found a credit card you like, you can apply online. If your application is accepted, the lender will set the credit limit and interest rate and issue the card to you.

Could a credit card suit your needs?

Common questions about credit cards

  • Credit is an arrangement where you buy goods or services now, but you agree to pay later. Credit comes in many different shapes and sizes including mortgages, personal loans, overdrafts and credit cards. In most cases, you'll have to pay an agreed amount back every month with interest. Whatever credit you choose, it's important to keep up with your monthly repayments.

    When considering your credit options, you may have a choice between a secured and unsecured loan. A secured loan is a loan backed by something of value you own used as collateral. The most common types of secured loans are mortgages and car loans. In these loans, the collateral is your home or car. If you don’t pay back your loan, the bank can seize your collateral as payment. A repossession stays on your credit report for up to six years and can affect your chances of getting credit from other lenders.

    An unsecured loan requires no collateral, but you are still charged interest and sometimes fees as well. Student loans, personal loans and credit cards are all example of unsecured loans. Unsecured loans tend to be based on your credit score and credit history, so if both are in good shape, you will be more likely to be accepted for this type of loan.

  • A credit limit is the maximum amount that you can use on a credit card. Your spending (including balance transfers and cash withdrawals) and any charges, interest or fees that are added must not exceed this credit limit. If it does, you may be charged an overlimit fee.

  • Here are a few general rules that are good to follow when using your credit card:

    • Make repayments on time – most lenders charge a fee for missed repayments
    • Pay more than just the minimum – if you can afford to repay more each month, you could boost your credit score and clear the amount owed
    • Set up a direct debit – so you never miss a repayment
  • The interest rate on your credit card is how much it costs to loan the money from the lender, on top of the actual amount. This is known as the APR (annual percentage rate) and is usually advertised alongside other details of the card. Keep in mind that your interest rate could be different from the advertised APR, depending on your credit score and financial history.

Money and borrowing services

  • Credit cards

    Find out about Post Office Credit Cards and check if you're eligible without affecting your credit score.