How do credit cards work?

Credit cards can be an easy and convenient way to borrow money, but there are several factors to consider before you apply for one.

Eve Powell
Eve Powell
Updated 16 January 2023  | 5 mins read

Key points

  • Credit cards work differently to debit cards and are a way of borrowing money
  • Some offer introductory interest-free periods which can help you spread out the cost of large purchases
  • You’ll pay interest if the full balance isn’t paid off each month (outside of introductory periods) and irresponsible use can affect your credit score
  • The APR can be a useful way to compare cards and work out how much a card will cost you

What is a credit card?

A credit card is a card you can apply for from a bank or card provider that can be used to borrow money for your spending.

Unlike a debit card, where the money is taken from your bank account, when you buy goods or services with a credit card the payment comes from the lender.

Once you’ve used the card, you’ll need to pay back what you owe at a later date. If you don’t pay the balance off in full every month, your lender will typically charge you interest.

How does a credit card work?

When you use a credit card, the card provider pays for what you’re buying and the amount is added to the balance you owe.

If you repay what you’ve spent in full and clear the balance on the card each month, you won’t have to pay any interest.

But if you can’t afford to repay the full amount, you’ll need to pay at least the minimum monthly repayment - an amount that’s set by the provider.

Anything you don’t pay off is carried over to the next month and you’ll be charged interest on the whole balance until it’s repaid.

Any missed repayments will show on your credit history and can negatively affect your credit score.

Things to know about credit cards

There are several factors to consider when you’re deciding whether to take out a credit card:

You’ll need to pass a credit check

Before you can receive a card, your lender will do a hard credit check to assess your reliability as a borrower. Every time a hard credit check is done it appears on your credit history, so it’s best to use our eligibility checker to find out your chances of being accepted before you apply.

Your credit score can be affected

How you use the card can also impact your credit rating. If you use it responsibly and make your payments on time it can help to increase your credit score. But any missed payments will appear on your credit report and can have a negative impact.

You’ll be given a credit limit

A credit card doesn’t mean unlimited spending power. Instead, your lender will give you a credit limit which is based on your financial situation and credit history. This limit is usually reviewed every six months, so there’s a chance it could be increased if you need it to be.

You’ll need to repay a monthly minimum

Each month you’ll need to pay at least the minimum repayment amount set by the lender. You’ll incur a fee for late or missed payments and it’ll be added to your credit report, so it’s wise to set up a Direct Debit.

You could face compound interest

If you don’t pay off the full balance each month, interest is added and carried over to the next month. The risk is that you could soon find yourself paying compound interest - when interest is added to the interest as well as the balance - and your debt quickly spirals.

Your credit utilisation ratio is important

It’s best not to spend up to your maximum credit limit as this could indicate you’re having money difficulties and it may be marked on your credit report. Instead, try to stick to using around 30% or less of your agreed limit each month.

What’s the APR?

Another important factor to consider when you’re looking into and comparing credit cards is the annual percentage rate (APR).

This tells you how much it’ll cost you to borrow on the card if you don’t pay the balance off in full each month.

Credit cards usually have higher APRs than other types of lending, but this is partly because they’re an unsecured method of borrowing.

And different APRs may be applied, depending on what you’re using your card for.

For example, the APR for cash withdrawals is usually higher than the APR you’d be charged for making a purchase. So it’s a good idea to check the small print.

Which credit card is best for me?

This depends on your circumstances and how you plan to use the card. There are several types of cards available that are designed for different purposes, these include:

Purchase card

This can be a cheap way to borrow and help spread the cost of a big purchase. They normally come with an introductory interest-free period which can span several months, but you’ll usually need a good credit score to be eligible for one.

0% balance transfer card

If you’ve already got a credit card or store card, you can move any existing debt from them onto a balance transfer card with a 0% or low interest period. The low interest can help you to repay what you owe more quickly, but transfer fees will apply.

Travel credit card

A travel credit card will help you avoid steep foreign transaction fees if you’d like to use your credit card abroad. It can help to keep your spending costs down while you’re away, but if you don’t clear your balance each month you could be charged a high amount of interest.

Rewards credit card

With this type of card, you can earn points, cashback, airmiles or other rewards as you spend. The points may only be applied for certain types of spending and these cards often charge an annual fee, so you’ll need to weigh up whether the rewards are worth it.

Credit building cards

If you’ve got little or no credit history, or a poor credit rating, a credit builder card can help you to improve it. Making sure you pay your minimum repayments each month can help to increase your score over time and could make borrowing cheaper and easier in future.

Is a credit card for me?

A credit card might be the right choice for you but it’s important to consider the pros and cons before you make a decision.


  • It’s a convenient way to pay - A credit card can help you pay for things instantly, whether it’s online or in person, without having the cash to hand
  • It’s more secure than using cash - Credit cards come with a higher level of security by offering buyer protection (on purchases over £100) which can help if something goes wrong with your purchase
  • It can help spread out costs - If you’re buying an expensive item, you can spread the cost out over several months rather than needing to have the money for it upfront
  • They can offer 0% interest borrowing - Cards that have an interest-free introductory period can give you time to pay off your balance without incurring interest
  • You can earn cashback and rewards - Some cards will help you to earn money or reward points as you do your normal spending. Accounts that offer this usually come with a monthly fee - so weigh this up to see if the benefits are worth it.
  • It can help to build your credit score - Using a card responsibly can help you to build up your credit score, something you can’t achieve by using cash or debit cards
  • You can use it to reduce your debt - A balance transfer card allows you to transfer your credit card balance to a card with a lower rate or even an interest-free period


  • You risk overspending - Your credit card may have a big limit that can be tempting to use up, which could get you into unnecessary debt and damage your credit score
  • Interest can lead to debt - If you don’t pay off your balance in full the interest that will be added can soon add up and can be hard to manage, leading to a circle of debt
  • You might have to pay fees - Some cards come with annual fees, particularly rewards cards. You can also face fees for cash advances and late repayments
  • Poor use can have long lasting effects - If you regularly hit your spending limit or miss repayments it can harm your credit rating and affect your chances of future borrowing
  • Applying for cards can damage your credit score - Applying for more than one card at a time or making applications close together can raise a red flag to lenders

Are there any charges and fees to consider?

Yes, sometimes there are charges and fees that can apply, so it’s a good idea to consider these before you take out a credit card.

Some credit cards, like rewards cards, can come with annual fees. So it’s important to factor these in and decide whether this type of card will be worth it.

It’s usually possible to use a credit card to take out cash - this is known as a cash advance. But typically, you’ll be charged more interest for using the card this way so it’s not advisable.

And if you miss or are late with any of your repayments, your card provider will charge you a late payment fee and it can be flagged on your credit history.