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Beginners' guide to credit cards

Learn more about basics of credit cards, their advantages and disadvantages and why it's important to choose the right one for your needs.

Consider before taking out a credit card:

  • What do I need the card for?
  • What sort of card is best suited to my needs?
  • What card will I qualify for with my credit rating?

Provided they're used responsibly and managed effectively, credit cards can be a flexible and convenient way to borrow money and pay it back over time.

What's a credit card?

A credit card is not the same as a debit card - when you pay for something on a credit card you're borrowing money.

Every time you use your card - whether it's to make a purchase, to withdraw cash or to transfer a balance from another card - you're effectively borrowing money.

Each card is the subject of a credit agreement between the cardholder and the provider.

This agreement is regulated by the Consumer Credit Act 1974 and details key financial information plus other details, such as that relating to missed payments, theft, loss and misuse of the card, your right to cancel and general terms. How to make your credit card work harder for you

You'll receive a copy of the credit agreement when you make an application.

If you don't pay off the full amount outstanding then any payments you do make will be allocated to the outstanding balance in a specific order, known as a 'payment hierarchy'.

For instance if new purchases have a 0% promotional interest rate, but a balance transfered from another card attracts interest immediately.

You can find details of this on your credit agreement and it may also be included on your statement.

It used to be common for providers to allocate payments so that transactions at the lowest rate of interest were cleared first, with those at the highest rate of interest cleared last, but this changed in 2011 when new rules came in to protect consumers.

Now, the transactions that attract the highest levels of interest are paid first, which should allow you to clear your balance as efficiently as possible.

If you do repay your balance in full each month, then no interest is charged.

However, if you only make the minimum payment each month then it'll take you longer and cost you more to clear your balance, as interest will be added to your debt.

Some cards come with an extended interest-free period, but if this ends and you're yet to pay off your balance you'll have to pay interest.

How credit rating affects card applications

When you apply for a credit card, the issuer will carry out a credit check. If you're judged to have a poor credit rating, the creditor may decide to turn down your application.

Alternatively, you may not be offered the advertised rate but will instead be charged a higher rate of interest.

Did you know...?

  • Credit card companies only have to offer the advertised APR to 51% of successful applicants - 49% can be offered a higher interest rate

Creditors in fact only have to offer the advertised APR to 51% of successful applicants - so 49% of people may not be offered the advertised rate.

If you need to rebuild a credit score or have never had a credit rating, you may want to consider a credit builder card.

These tend to have high interest rates and to put limits on the amount of money you can borrow but - if used responsibly - help you to become a lower risk to credit companies, so helping to improve your chance of getting a more attractive deal in the future.

You can obtain a credit file that will give an indication of your credit worthiness from the main credit bureaus, Equifax, Experian and Callcredit, or from various other third-party reference agencies.

"If you've been declined for credit cards, stop applying - every application will leave a footprint on your file which lenders will see as a warning signal that you may be over-stretching yourself financially," said Gocompare.com's Matt Sanders.

"This shouldn't trouble you when you first enter our credit card comparison service - at this point you're just browsing through the options that are on the market.

"Do take care if you choose to take the next step and actually apply for a card, though. That's when you need to be realistic about what you will or won't be accepted for." How to improve a credit score

You can also avoid harming your credit score by using our smart search tool before you apply.

'Smart search' makes a soft search for credit cards before you proceed with a formal application.

Such a soft search will show you the cards you're likely to be accepted for without impacting on your credit history.

Advantages of credit cards

Purchase protection

Under Section 75 of the Consumer Credit Act, credit card issuers and retailers take joint responsibility for faulty purchases.

This means that if you pay for something valued between £100 and £30,000 with your credit card your purchase will be protected in the event that it's faulty or you do not receive the goods or services you've paid for. In such cases, you can claim a refund from your card provider.


Some providers will offer incentives for using your plastic, such as loyalty points, cashback or donations to charity.

Flexible credit

Most cards offer an interest-free period, meaning you can benefit from free, short-term credit if you clear your balance in full by the due date. They offer flexibility and convenience, allowing you to make emergency purchases or pay for more expensive items by instalments.

If you've been declined for credit cards, stop applying - every application will leave a footprint on your file
Matt Sanders, Gocompare.com

Disadvantages of credit cards

It's easy to run up large debts

Whilst it's easy to run up a large debt on your plastic, it can be much harder to repay it, and this can take a considerable amount of time.

Interest charges

If you incur interest charges it can take longer to clear your balance, and will probably end up costing you more.

No interest-free period for cash advances

Interest rates for withdrawing cash are usually significantly higher than for balance transfers or purchases and there's no interest-free period, meaning interest is charged from the date of the withdrawal, regardless of whether you clear your balance in full or not.

Credit card charges

Most credit card providers will charge a fee if you:

  • Fail to make the minimum payment by the due date
  • Exceed your credit limit
  • Have a direct debit or cheque returned unpaid

If you have a habit of forgetting that your payment's due, setting up a monthly direct debit will help you to avoid late or missed payment charges.

Remember that missed payments can have severe consequences, and may affect your ability to obtain credit in the future.

Choosing the right credit card Cashback credit cards

Your credit history and the way you use your plastic is the key to finding the right deal. We've put together a few common scenarios to help you decide which option may be the most suitable for you.

You always pay your balance in full each month

If you always pay your balance in full each month then you can use the interest-free period offered by most cards to your advantage, avoiding interest charges.

Interest rates aren't likely to be your primary motivation - instead, think about looking for a card that offers a good incentive scheme, such as a cashback card or a reward card.

You clear most, but not all, of your balance each month

If you clear most, but not all, of your balance each month then you may want to consider a card with an introductory rate, preferably 0% interest.

A number of providers offer interest-free introductory periods, but you should always check what the interest rate will revert to when the introductory period expires - if you haven't cleared your balance in full by this time then it will start to accrue interest.

If you do still have an outstanding balance at the end of the introductory period, you may want to consider making a balance transfer to another card to take advantage of another introductory rate.

Remember that it's dangerous to assume you'll qualify for a new balance transfer deal. Your circumstances can change and card issuers can change their qualification criteria, meaning that you could be stuck with your old card when the introductory period ends.

If you don't think you'll clear your balance by the end of the introductory period and you can't be bothered switching, then a product that has a low standard rate may be a longer-term solution.

You already have debt on a credit card

If you're planning on using a credit card abroad, it's important to know what you'll be charged for and where
Matt Sanders

Similarly, if you have an existing debt to transfer and are paying the standard rate of interest then you could save money on interest charges by transferring it to a new card that offers a low or 0% balance transfer rate.

Most providers now charge a fee for balance transfers, which is typically 2-3% of the amount transferred.

Even if there is a fee, transferring your balance can still be cost effective if you're switching to a 0% or low interest rate offer - do the maths.

If you also plan to use this card for new purchases then look for a provider that offers an introductory period for both purchases and transfers.

Alternatively, have a credit card for each purpose - one for the balance transfer and the other for new purchases.

You regularly use your card overseas

If you regularly take trips abroad and use your plastic to pay for goods or services, then you could get some major benefits from a card with no overseas usage fees.

Credit card exchange rates are based on the Visa and MasterCard wholesale rates, with an additional charge (loading percentage) of up to 3% added by the card provider.

Not all providers will charge these fees, and if you find one that doesn't it can equate to a significant saving when you make a large number of overseas transactions.

While taking a credit card abroad provides peace of mind when making purchases, try to avoid withdrawing cash while on holiday. Cutting the cost of loans

"If you're planning on using a credit card abroad, it's important to know what you'll be charged for and where," said Sanders.

"Withdrawing cash is usually the most expensive way to pay when you're abroad and it won't give you the additional protection that paying by plastic does.

"Try to avoid ATMs and use cards for purchases in restaurants, with tour operators and at attractions."

Find out about other types of credit cards, including business credit cards and premium credit cards - in our credit card guides.

Credit card fraud, loss, theft and misuse

If you're the victim of financial fraud, or your card is lost, stolen or misused without your permission, you should not be expected to pay.

To protect your card when shopping online, you should keep your PC protected by using a firewall and up-to-date anti-virus software.

If you're using a wireless connection then ensure it's encrypted.

Before entering any personal details into a website, look for a padlock symbol in your browser or check that the website address starts with 'https' as these both indicate that you are within a secure area of the site.

You can also register for 'Verified by Visa' or 'MasterCard SecureCode' as these add an extra layer of protection when using your card to buy goods and services online.

Read more about how online card payments work in our guide.

Ensuring you can meet repayments

The reputation of any sort of payment protection for credit cards has been tainted by the PPI scandal, but the right income protection policy can be a valuable product and may mean you could cover your card repayments if you're unable to work due to injury, illness or unemployment. A stack of £20 notes

If you're in a situation where you're finding it difficult to make your repayments and you're unable to reduce the amount you're paying on interest charges by switching to a credit card that offers lower interest rates, contact your provider at your earliest opportunity to discuss your options.

Credit providers are usually keen to help and come to an arrangement, and may offer you the chance to take a payment holiday - this is a break of a few weeks or months, depending on your needs.

You can also contact your local Citizens Advice Bureau, National Debtline or StepChange Debt Charity (formerly the Consumer Credit Counselling Service) for free advice.

By Emily Bater