A simples guide

How does a credit card work?

The world of credit and debit cards can be confusing to the uninitiated. What is a credit card? What’s the difference between a credit card and a debit card? Do you qualify for a credit card? How do you get a card and what are the best deals? We can help you understand how credit cards work.

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What is a credit card?

Essentially, it’s the handy piece of plastic that means you can buy anything on credit. You can make online purchases, pay for products and services in shops and restaurants and even use them in cash machines (although with credit cards there are high fees so you might not want to do that.)  The most common types of credit card are MasterCard and Visa, but there are others.

Most banks and financial institutions have their own credit cards offering varied rates and promotional benefits. Even supermarkets and charities have launched their own credit cards.

It’s a cut-throat market with massive competition to attract customers, some providers even offer little or no interest on initial transactions. It is important to make sure that you fully understand exactly how your card works and what fees are applicable to you, as this can often be a confusing experience with your first card.

So how does a credit card work? After you have successfully been accepted for a credit card by a provider you will be offered a credit limit. This might be what you have applied for but it could also be a lower limit offered by the provider based on your personal circumstances. You can then spend on this card up to this set limit but don’t forget you’ll need to pay off your outstanding balance each month to avoid paying any interest. 

credit card

What are the benefits of having a credit card?

Spreading the payments of large purchases can be one of the biggest benefits of using a credit card. You can make a purchase today and then repay the balance over the course of several months.

A debit card works in a different way. It only allows you to spend the money in your account. A credit card gives you a lending facility that means you can spread payments of any size and manage your money more effectively.

If your credit card comes with an interest-free on purchases period and you make the purchase within that time then that money is like an interest-free loan, providing you manage your money effectively. Smart credit card users with good credit records can even practice ‘stoozing’, which is the art of switching balances between 0% balance deals to make sure they don’t pay interest on their outstanding balance.

With so many to choose from it’s actually possible to pay no interest on your credit card purchases and to simply transfer the balance as your introductory period comes to an end. You need to be organised and disciplined if you are going to attempt this though.

Credit cards can be convenient too; as you don’t need to visit a cashpoint and you can simply make payments on the card itself. If you keep your account in order and make your repayments on time, the credit card provider may allow you to increase your limit. This means you can make larger purchases, use your card while you’re on holiday or even pay for the full trip itself via credit.

Purchase protection is one of the biggest benefits of credit card ownership. The Consumer Credit Act means that the retailer and your credit card company both take a degree of responsibility for anything bought on the card. So you’re protected if you purchase any product that costs more than £100 and less than £30,000 should it not arrive, be damaged or be subject to another problem – great news for all of us.

Some cards also offer loyalty bonuses, air miles or even money off your weekly food shopping as a promotional tool – it’s worth having a look around.

credit cards

Do I qualify for a credit card?

A credit card is a serious financial commitment and you have to prove that you are creditworthy before a financial institution will let you spend their money. There are of course, things you can do to boost your chance of acceptance. Some of the primary criteria that many institutions recommend you meet before applying include:

- Being over 18. There’s not much you can do about this one, except wait if you’re too young.

- Get on the electoral roll. If you are not registered, there is a real chance your application will be refused.

- Cancel any cards you are not currently using. The amount of credit that you can access is just as important as your past credit record in the modern era, so if you have unused credit cards, make sure you cancel them.

- Make sure you have a job or an income of more than £8,500or it could be tough to get a credit card at a reasonable interest rate.

- Be a resident of the United Kingdom, Isle of Man or Channel Islands. If you have previously declared yourself a non-resident and now returned to the UK, make sure that you have it rectified.

What charges can affect credit card users?

Late charges, missed payments and hefty interest rates mean that you have to treat credit cards with respect, and a lot of people have got into serious debt by spending money they simply could not afford to pay back – make sure you’re not one of them.

You need to keep on top of your repayments, too, as paying less than the minimum amount could mean you get late charges, defaults and you can even lose your 0% interest in some cases. So missing a payment can prove costly.

If you decide to withdraw cash on your credit card, your provider can charge a percentage of the amount you withdraw. There can also be balance transfer charges if you transfer to another 0% deal, for instance, although sometimes the new card company will cover those.

Use them responsibly though, and credit cards can be a great tool that can help you plan your finances, make major purchases and keep you rolling during the working month. Exercise self-control and educate yourself on the charges you might have on your credit card.

You can get the best deal on a credit card that suits your needs by comparing with us, we take care of all of the hard work by submitting your information to leading providers and offering you a list of a range of credit cards suited to your needs in minutes.

Any interest rates referenced in this article were recorded in April 2016 and may no longer be available from credit card providers.

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