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How do credit cards work?

With so many credit card options available, it’s easy to get confused. And if you don’t manage your card well, it can have a huge impact on your credit score. We explain how credit cards work, and how to find the best card for you and your situation.

With so many credit card options available, it’s easy to get confused. And if you don’t manage your card well, it can have a huge impact on your credit score. We explain how credit cards work, and how to find the best card for you and your situation.

Written by
Alex Hasty
Insurance comparison and finance expert
Last Updated
23 APRIL 2024
7 min read
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What is a credit card?

You can use a credit card to buy something now and pay for it later. The card allows you to spend money up to a set limit.

When you buy something with your credit card, the company that issued it will pay the seller. You then owe the money to the card issuer and have to pay it back.

The card issuer will bill you, telling you how much you owe and the minimum you must pay each month toward your debt.

If you pay the entire amount you owe when you get the bill, you’ll only pay back what you spent. If you pay it back over time, you’ll also pay interest on the credit you’ve been given.

The card company makes some money from the retailer for using its payment services, plus any interest you pay on your debt.

Credit card need-to-knows

If you’re new to credit cards, here’s what you need to know.

Who’s eligible for a credit card?

Each credit card issuer has their own criteria for who they’ll lend to. This will be based on factors including your age, salary, credit score and credit history, together with the information you give in your application.

The application process

When you apply for a credit card, you’ll need to give details of your income, job history and employment status, your outgoings and your previous addresses.

The card provider will carry out a hard credit search, which is an in-depth look at your current credit situation and how you’ve handled credit in the past. It helps the provider decide if you’re financially responsible and how likely you are to pay them back.

They’ll then decide whether to accept your application, what interest rate you’ll pay and the amount of credit they’re willing to offer you – your credit limit.

If you’re accepted, you’ll be sent your new card and PIN. You’ll also be sent paperwork explaining the fees for using the card as well as other terms and conditions.

Using your credit card

You can use your card to make payments on the high street and online.

Credit card companies have sophisticated ways of detecting fraud, so you may be asked to verify who you are when you use your card. For example, you might be sent a verification code. And you may be asked to give your PIN as an extra precaution from time to time. 

Your credit card bill and how to pay it

Every month, you’ll receive a credit card statement setting out:

  • What you’ve spent up to a particular date
  • Any payments you’ve made since your last statement
  • How much you owe in total up to a particular date
  • Any interest that’s owing
  • Any fees that must be paid
  • The minimum payment you must make
  • The date your payment is due by.

If you choose, you can pay your bill by direct debit. Your card issuer should also allow you to make payments directly from your bank account or via their app with a debit card. You may also have the option to pay in a branch of the bank, by cheque or via a cash machine (ATM).

Compare the Market Limited acts as a credit broker, not a lender. To apply for a credit card you must be a UK resident and aged 18 or over. Credit is subject to status and eligibility.

How does credit card interest work?

If you don’t pay your bill in full by the date given, you’ll be charged interest on any outstanding balance.

If interest is to be charged, it will be charged from the date a purchase is debited from your credit card until it’s repaid in full.

When do you pay interest on a credit card?

If you don’t pay your balance in full, you’ll have to pay interest on the outstanding balance.

You won’t pay interest if you’re within the interest-free period for purchases and you pay your balance in full and on time.

However, if you use your card to withdraw cash, you’ll be charged interest from the date the cash is taken out.

Why use a credit card?

There are several benefits of using a credit card, including:

  • Could help you spread the cost of one-off purchases.
  • Offers flexibility. If you can afford to, you can pay more than the minimum monthly payment without being charged a fee.
  • Could give you additional protection on your purchases under Section 75 of the Consumer Credit Act (if your purchase is eligible under the terms and conditions).
  • Could reward you with perks, such as vouchers or cash back.
  • Can help you build a good credit score if you use the card responsibly.

There are downsides though, including:

  • If you only make the minimum payment each month, it can take a long time to pay off what you owe.
  • Can tempt you to spend and build up debt, which you might be unable to repay.
  • If you don't pay off the balance in full every month, you’ll be charged interest on what you owe.
  • Missing a payment or paying late can result in extra fees and can have a negative effect on your credit score.

How to use a credit card wisely

The way you use a credit card can affect your credit history and credit score, so it’s important to use it wisely. Try to make sure you:

  • Don’t build up more debt than you can afford to pay off.
  • Pay off your card in full every month. If you can’t afford to do that, then aim to pay more than the minimum.
  • Pay on time to avoid being hit with late payment fees. Setting up a direct debit can make sure this happens.
  • Keep your spending well under your credit limit.
  • Keep track of any interest-free periods so you can pay off the card balance during that time.
  • Avoid using your card for cash transfers and cash withdrawals because you’ll start paying interest on them immediately.

How to pay off a credit card

You should pay off your card in full every month, if possible. If not, try to make more than the minimum payment. This will help clear your debt faster and will mean you pay less in interest overall.

See our guide to paying off your credit card.

If you’re worried about your credit card bill, this could be a sign that you need help with debt.

There are organisations that can provide free, non-judgmental help if you’re having financial problems, including:

Should I get a credit card?

That’s an entirely personal decision, but a credit card can be very useful in a number of ways.

For example, a 0% interest purchase credit card allows you to make a large one-off purchase, like a new boiler, then spread the payment over several months without paying interest.

And a credit card could be a good first step to showing you can be responsible with credit – and it can help you build up a credit history.

But you need to be disciplined with your spending on a card. Just because you have a credit limit doesn’t mean you should spend up to it. And just because you’ve seen something you want doesn’t mean you have to buy it.

What credit card should I get?

There’s a variety of credit cards available. Look for one that suits your needs.

Why compare credit cards with Compare the Market?

Check which credit cards you’re eligible for in less than 4 minutes [1], without impacting your credit score.

Filter by type of card you’re comparing.

[1] Correct as of March 2024.

Frequently asked questions

How do refunds work on credit cards?

If you return something you’ve bought on your credit card, you won’t get the money back in cash. Instead, you’ll receive credit on your card.

How long it takes for the refund to appear on your credit card will depend on where you are in your credit card billing cycle at the time.

How to work out minimum payments on credit cards

Your credit card provider will set out how they calculate the minimum payment. It will be either a percentage of the amount owed or a flat fee.

How to work out APR on credit cards

APR is calculated by taking into account the rate of interest, along with any other standard charges, like an annual fee. Essentially, APR is what your borrowing will cost each year.

Can you pay off a credit card with a credit card?

You typically can’t make a credit card payment using another credit card.

However, a 0% balance transfer card allows you to move debt from an existing credit card or cards to one with zero interest.

Can you be in credit on a credit card?

There are a few reasons why you might be in credit. If you’ve paid for something that you later return and is refunded, for example. Or perhaps your card provider issued a refund for a late payment fee on a previous balance.

You may have paid you last credit card bill twice by mistake or perhaps you paid more than the outstanding balance.

If you’d rather not have the extra credit on your card, you can ask your card provider to transfer the credit amount into your bank account.

The content written in this article is for information purposes only and should not be taken as financial advice. If you require support on the products discussed here, please speak to your bank/lender or seek the advice of an independent professional financial advisor. We also have more information on our Customer Support Hub.

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Alex Hasty - Insurance comparison and finance expert

At Compare the Market, Alex has had roles as Commercial Associate Director, Director of Trading and Director of Growth. He’s currently responsible for the development and execution of Comparethemarket’s longer-term strategic options, ensuring the right breadth of products and services that meet customer needs.

Learn more about Alex

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