Credit cards: a guide

Thinking of getting a credit card? Our guide will help explain the ins and outs, breaking down terms like representative APR, balance transfer and many more.

Written by

The Editorial Team

Experts in personal finance, insurance and utilities

Posted

5 FEBRUARY 2021

6 min read

How does a credit card work?

A credit card lets you buy things using credit, typically up to a pre-set limit. How much you’ll be able to borrow depends on how confident your card provider is that you’ll be able to pay them back. If you pay off any outstanding balance on your credit card bill in full each month, then you won’t pay interest on what you’ve borrowed; however if you don’t then you will be charged interest, how much will depend on the deal you have with your provider. You’ll need to be 18 to apply for a credit card, and some cards have a minimum age of 21.

What should I consider before applying for a credit card?

The first questions you should ask yourself before applying are: can I afford this, and do I need this? You need to be completely sure you’ll be able to pay at least the minimum payment each month (even if you have an interest-free period). If you do proceed with a card, you could also choose to set up a direct debit to pay off your full balance each month, as this could ensure you don’t miss a payment. If you were to miss one or more payments, you could end up with unwanted charges and this could negatively affect your credit score.

It’s important to remember that, as well as standard interest charges, you could be charged in other ways for using a card. For example if you make cash withdrawals on a credit card, interest is typically charged from the day you take out the money. Other charges can also apply, including an annual fee, and that’s why it’s really important to understand all of the terms and conditions before you apply for a card.

What’s a credit report?

A credit report contains details about your credit history. Most credit card providers use credit reports to decide if you’re a high or low risk when it comes to borrowing. To get a credit report, visit one of the following three most popular agencies: Experian, Equifax or TransUnion (formerly Callcredit).

If you'd like to get detailed information about your credit report, each agency offers free access for a limited time:

Experian will provide your credit score for free, but you won’t have access to the full report. Or, you can use their CreditExpert product for 30 days free and then pay £14.99 a month.
Equifax also gives free access for 30 days, after which you’ll be charged £7.95 a month
TransUnion offers a free statutory credit check

All prices were correct as of February 2021. A good credit rating will improve your chances of a successful credit application. What’s more, it could give you access to cards offering the lowest interest rates and/or promotional offers.

How can I build up my credit score?

If you use a credit card sensibly, over time it can help to improve your credit score. If you meet all repayments and repay outstanding debts on time, your score is likely to improve. Obviously, the opposite is true if you start missing payments.

If you’re concerned about having a poor credit history, you might want to think about applying for a credit-building credit card. If you are accepted for one of these cards, you may be able to improve your score and potentially unlock better deals in the future as you have a chance to prove that you’re able to make all of your repayments on time. With this type of card you can expect any initial credit limit to be fairly low, and interest rates to be high. Find out more about ways you can build your credit score.

What types of credit card are there?

There’s a wide range of credit cards available on the market, including ones that offer:

Also, there are credit cards which will offer a combination of two (or more) of these benefits. It’s worth keeping in mind that, because interest rates can be very high, you could quickly find yourself in serious debt if you struggle to meet repayments as your outstanding balance will keep growing each month. To help you avoid charges, you should make a note of when your payment date is (this should be on your monthly statement) and keep an eye on your balance regularly. Again, you may find that setting up a direct debit could help you avoid missing payments and reduce the likelihood of incurring any charges.

How is interest calculated on a credit card?

The interest rate you’ll see lenders advertise is, at its simplest, the price at which you can borrow money from them. APR, or annual percentage rate, is typically stated as a yearly rate for credit cards and it’s worked out by taking into account the interest rate on the card along with other charges such as an annual fee.

You’ll see two rates advertised under the headline of ‘APR’ – these are the representative rate and the standard purchase rate. For credit cards, the representative rate is the rate you could be charged just for borrowing money as well as standard charges such as an annual fee. It doesn't take into account different rates and fees which could apply for using the card, for example the costs if you were to make balance transfers or cash withdrawals. Additionally, it won’t include any fees or charges for late payments or other charges.

Learn more about how interest rates work, including what compound interest is, by reading our guide to APR for credit cards.

How can I apply for a card?

The three main ways to apply for a credit card are:

By post – you fill in the paper form and sign.
In branch – If you visit the bank, someone there can help you with the application.
Online – you complete a form over the internet.

Our comparison site is really easy to use – in fact, it could take less than a minute to compare deals from our wide panel of credit card providers.

What protection can I get by using credit?

Purchases of between £100 and £30,000 are protected under Section 75 of the Consumer Credit Act. This means that if you purchase an item on your credit card which turns out to be faulty, or the company goes bust before you receive your goods then you should be able to claim a refund from your credit card provider.

Control the cash

Whilst you can use your credit card to withdraw cash, it’s not necessarily the wisest idea. Most cards will charge you for taking money out at a cash point and the interest rates on cash withdrawals tend to be higher too.

How long does it take to get a credit card?

Times can vary depending on which application route you take, but as a general rule between 10 and 14 days is normal. Obviously, if you’ve applied by post this is likely to be the slowest route as you need to factor in postal times.

With standard credit card applications you’ll be asked a series of questions about your personal details and circumstances. This information is then reviewed by the credit card provider. If you’re applying online some providers now use instant decisions, so could find out whether you have been accepted in minutes.

During an instant decision, your details are checked automatically. This will include:

Your identity validation
Your credit score
Fraud checks

By doing these checks automatically, it could shorten the time a provider needs to retrieve your details and then make a decision.

Compare credit cards

It can take a minute to compare credit cards. So, why not see if you can get a deal that meets your needs?

Looking for a credit card?

Compare credit cards quickly and easily. Use our eligibility checker to find a credit card deal that suits you – and find out if you’re likely to be approved without it affecting your credit score.

Compare now