How does a credit card work?
Credit cards explained
If you're new to credit cards, the idea can be daunting. Yet used correctly, they can provide valuable free protection, a chance to (re)build your credit rating and special 0% deals offer the cheapest way to borrow. This guide explains the different types of cards available and what to watch out for, so you don't get burnt.
First, a quick overview of how credit cards work...
A credit card lets you borrow money to pay for things. The card provider pays the retailer, then sends you a bill for what you’ve spent.
Pay the bill in full and on time and you’ll usually avoid interest. If you don’t clear it, you’ll usually be charged interest on the full balance.
You must pay at least the minimum each month. Miss this and you could be charged a fee, lose any promotional rate and damage your credit file.
Don’t spend more than you can afford to repay. Used well, credit cards can offer purchase protection, help build your credit history or earn rewards. Used badly, they can be expensive.
Different cards do different jobs, so pick one that matches what you need. Some are designed to cut existing card debt, some are for planned spending, others are for rewards, travel or building your credit history.
Type of card | What it does |
|---|---|
Allows you to shift debt to 0% for a set period | |
Gives you an interest-free period on new purchases | |
Offers cashback or reward points on spending | |
Good for shifting debt AND spending | |
Lets you spend abroad fee-free | |
Lets you pay cash into your bank (eg: to clear an overdraft) | |
Designed to improve your credit score |
What are credit cards and how do they work?
In a nutshell, a credit card lets you pay for things. But rather than taking money from your account each time you spend, the credit card company pays and sends you a bill for it all each month.
If you pay this bill off in full and on time, you’ll usually pay no interest on purchases. But if you opt to pay a smaller amount, the rest is carried over to the next month and you’ll be charged interest on the full statement balance until it’s repaid, unless you have a 0% spending card.
Credit cards also come with a minimum monthly repayment. This differs from card to card, but is usually around 2% of the remaining balance, or £10 to £25 if your balance is less than that. If you fail to pay at least the minimum, it’ll likely cost you a fee and affect your credit score.
The term “credit card” is therefore not very helpful, and is better understood as a “debt card” or “borrowing card”. Any spending on the card is actually running up a debt that you need to pay back, not using credit that has been given to you.
What can you use a credit card for?
What you can use a credit card for depends on the type of card you have. Some are designed for everyday spending, while others are for specific jobs such as cutting debt, spreading costs or building your credit history.
You could use a credit card to:
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Pay for everyday spending – but only if you can repay it IN FULL each month.
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Spread the cost of a planned purchase – a 0% spending card can help, provided you clear it before the 0% period ends.
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Shift existing card debt – a balance transfer card can move debt to 0% for a set period.
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Earn cashback, points or air miles – reward cards can be useful if you always repay IN FULL.
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Spend overseas more cheaply – specialist travel cards can cut or avoid foreign-use fees.
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Build or rebuild your credit history – credit-building cards can help if used carefully and repaid on time.
How to get a credit card
There are a few steps in the process of getting a credit card after you've decided on the right one for you.
Step 1. Check your chances of being accepted for a card before applying. Use our eligibility calculator to check your odds before you apply (without it going on your credit file).
Step 2. Submit an application. This can usually be done via the card provider's website or in branch. The provider will do a credit check where they assess whether they want to lend to you. See applying for a credit card.
Step 3. Your card should arrive within two weeks. If successful, the provider will send you your card in the post and you can then start to use it.
Step 4. You'll have a credit limit and will be billed each month. Your card will have a set minimum monthly repayment, so make sure you at least pay this. Better still, if you can, pay it off IN FULL to avoid paying interest.
Five key credit card need-to-knows
Here we'll take you through the main parts of getting and operating a credit card, though always remember that all debt is like fire – used right it's a useful tool, but used wrongly you'll get burnt.
1. You'll need to pass a credit check
You’ll usually need to pass a credit check to get a credit card. When you apply, providers consider details such as your income, financial commitments and prior credit history to decide how 'risky' you are to lend to, which determines whether they accept you and what credit limit they offer.
Acceptance criteria vary by lender, so check your eligibility before applying. This shows your chances without affecting your credit file. But remember, a full application will leave a mark on your credit report, which could impact your ability to get future credit, so if you're rejected it's best to wait. See boost your credit score for full info and how to check your score for free.
2. You'll be given an agreed credit limit
Your credit limit is the maximum amount you can owe on the card at any one time. It’s set by the provider, usually based on your income, credit history and wider finances.
Don’t go over it – you could be charged and it may harm your credit file. You can usually ask to reduce your limit, and may be able to ask for an increase once you’ve had the card for a while. See our Credit limit too low? guide and our High credit limits cards guide for more information.
3. Make sure you ALWAYS pay at least the monthly minimum – set up a direct debit for safety
Each month, you’ll get a statement showing your balance, minimum repayment and payment due date. Always pay at least the minimum by the deadline.
Miss a payment and you could be charged a late fee, damage your credit file and lose any promotional rate. Set up a direct debit for at least the minimum repayment as a safety net – though paying more, or clearing the card in full, is better if you can.
See Credit cards minimum repayments calculator for more.
4. You'll pay interest if you don't clear the balance IN FULL each month, plus avoid expensive cash withdrawals
If you clear your balance in full and on time each month, you’ll usually avoid interest on purchases. If you don’t, interest is usually charged on the full statement balance, not just the amount left unpaid.
Credit card interest is shown as an APR. Typical APRs are often around 21% to 25%, though they can be much higher – sometimes up to 60% for those with poorer credit scores.
Avoid withdrawing cash on a credit card. Interest is usually charged straight away, often at a higher rate, and you may also pay a fee.
5. How well you manage your credit card will impact your credit file
Your credit card use is reported to credit reference agencies. Paying on time, staying within your limit and managing the card well can help your credit file.
Missed payments, going over your limit or frequently withdrawing cash can harm it. Missed payments can stay on your credit file for up to six years.
Sign up to our Credit Club to see your credit score and how you appear to lenders and see our Credit scores guide for our top tips to boost your creditworthiness.
Try our free Credit Club
Sign up to MSE's Credit Club to boost your credit power – access our free tools to see how the financial world views you, including:
An Eligibility Rating that combines your credit score, affordability, and market trends.
View your full credit report – your financial CV.
Get personalised acceptance odds for credit cards and loans.
Credit card pros and cons
Credit cards can be useful, but only if used carefully. Used wrongly, they’re a form of debt that can become expensive and damage your credit file. Yet equally debit cards (the card linked to a bank account) are debt cards too for those who are overdrawn and use them wrong. Plus these days, with 40% APR overdrafts, debit cards can be far costlier than credit cards.
If you’ve had problems with credit cards before, don’t trust yourself not to overspend, or are already struggling with borrowing, they may do more harm than good. But if you avoid them just because you think all credit cards are bad, you could miss out on useful benefits such as purchase protection, credit-building, 0% borrowing or rewards.
Here are the main pros and cons to consider:
✔️ Pros | |
Extra protection on purchases | Anything you buy on a credit card that costs £100 to £30,000 (so even if you only pay 1p of it on the card) is given Section 75 protection, which means the card firm's jointly liable with the retailer for the ENTIRE amount if something goes wrong. This is hugely powerful and another lifeline if the retailer goes bust or won't play fair. |
Can offer cheap borrowing or rewards | There are many different types of credit card with some offering 0% interest and others that pay cashback or reward points to use them. So a credit card used right can save or make you £100s or even £1,000s. |
Can boost your credit score (so other borrowing can be cheaper) | A well managed credit card (staying within the credit limit and paying at least the minimum on time every month, though better to clear IN FULL) can improve your credit score as it evidences your ability to stick to an agreement and, ultimately, repay. This can lead to lower rates or greater chances of acceptance for other products, such as loans or mortgages. |
⚠️ Cons (things to look out for) | |
Avoid if you already struggle with debt | If you know you can't trust yourself not to spend more than you can afford to repay, then a credit card may do more damage than good. Equally if you're already in debt, try and refrain from taking on more, instead see our Debt problems guide for what to do and where to get help. |
Beware the minimum repayment spiral | You MUST pay at least the minimum repayment to stick to the agreement, but beware doing so as interest can soon mount up. Always have a plan to pay back the balance or the interest can soon add up and the amount you owe can easily spiral to levels you can no longer afford. |
Can wreck your credit score for years (and prevent you from getting other borrowing) | A badly managed credit card (missing or late payments and exceeding the credit limit) can damage your credit score as it shows other lenders that you could be risky to lend to, and they may not get their money back. Your credit score can be tarnished for up to six years, which may mean it's harder to get other types of borrowing, or the rates you're given are much higher. |
Different types of credit card explained
Here’s how the main types of credit card work, plus the key rules to avoid getting caught out.
Balance transfer credit cards – shift existing card debt to 0% interest
A balance transfer card lets you move existing debt from another credit or store card to a new card, usually at 0% interest for a set period. The new card provider pays off the old card debt, and you then owe the balance to the new provider instead.
The longest deals typically have a one-off fee as a percentage of the amount borrowed, but there are cards that have no fee. Pick the card with the lowest fee in the time you're sure you can repay.
See top picks and full info in our 0% balance transfer guide, or check your odds of acceptance using our eligibility calculator.
Golden rules for 0% balance transfer cards
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Clear the card or transfer again before the 0% ends, or the rate soars to typical 23.9% to 24.9% interest rates, though it can be much higher (see APR examples).
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Never miss the min monthly repayment, or you may lose the 0%, get hit with a £10ish late fee and get a credit report black mark.
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Don't spend/withdraw cash – it usually isn't at the cheap rate.
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You must usually transfer within 60 or 90 days to get the 0%.
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You usually can't balance transfer between two cards from the same banking group.
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Important. Balance transfers are for those who can meet repayments. If you're struggling, check our Debt help guide for alternative options.
0% spending credit cards – no interest for a set number of months, so cheapest way to borrow
These cards offer a number of months where no interest is charged on new spending, so done right there's no cheaper borrowing – though they're not an excuse to overspend. Use them for a needed, planned and affordable one-off purchase (for example, replacing a broken fridge).
See top picks in our Best 0% spending credit cards guide or check your acceptance odds using our eligibility calculator.
Golden rules for 0% spending cards
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Clear the debt or balance transfer before the 0% ends, or costs soar to typical 22.9% to 24.9% interest rates, though it can be much higher (see APR examples).
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Always pay at least the monthly min and stick within your limit or you can lose the 0% and get hit with £10ish fees.
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They're usually only cheap for spending, not cash/balance transfers.
Cashback, airline & reward credit cards – get paid to spend
Reward cards give you cash or loyalty points when you spend on them. So as long as you repay them IN FULL each month and don't exceed your credit limit, you just have plastic that pays you to spend on it.
See top picks in our reward credit cards guide or check your odds of acceptance using our eligibility calculator. Plus, see our Air miles credit cards guide for the top cards that offer air miles.
Golden rules for reward credit cards
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Clear IN FULL each month to avoid interest, which wipes out the gains from the rewards (see APR examples).
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Never miss the min monthly repayment, or you'll pay a £10ish late fee and get a credit report black mark. But as we say above, if you don't repay IN FULL each month, don't bother getting these cards.
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Don't withdraw cash – it's expensive & there's no reward.
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Never go over your credit limit or you'll pay a £10ish fee.
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Some cards have an annual fee just to keep the card, so make sure to cancel if you stop using it.
All-rounder credit cards – get 0% on balance transfers AND spending
Most credit cards are good for new spending OR cutting the cost of existing debt, but an all-rounder card offers 0% intro rates for a number of months on both.
You can usually get a longer 0% period with a dedicated balance transfer card, though if you have a need to borrow further, then an all-rounder card offers one fewer application hitting your credit file, protecting your creditworthiness.
See top picks in our top all-rounder credit cards guide, or check your acceptance odds using our eligibility calculator.
Golden rules for all-rounder cards
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Clear the card or transfer again before the 0% ends, or the rate soars to typical 23.9% to 24.9% interest rates, though it can be much higher (see APR examples).
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Never miss the min monthly repayment, or you may lose the 0%, get hit with a £10ish late fee and get a credit report black mark.
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Don't withdraw cash – it usually isn't at the cheap rate.
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You must usually transfer within 60 or 90 days to get the 0%.
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You usually can't balance transfer between two cards from the same banking group.
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Important. Balance transfers are for those who can meet repayments. If you're struggling, check our Debt help guide for alternative options.
Travel credit cards – near-perfect exchange rates on overseas spending
If you travel regularly or pay for things in other currencies while in the UK, then specialist travel cards are a winner.
Usually if you pay on plastic, the card firm adds a 3%-ish 'non-sterling transaction fee'. Yet the fee is waived by specialist cards, so you get the rate at the same near-perfect rate the bank does, smashing bureaux de change.
See top picks in our travel credit cards guide, or check your acceptance odds using our eligibility calculator.
Golden rules for travel credit cards
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Clear in IN FULL each month or you'll pay interest, which wipes out the gains from the exchange rate (see APR examples).
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Never miss the min monthly repayment or you'll get a £10ish late fee and a credit report black mark.
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Never go over your credit limit or there's a £10ish fee.
Money transfer credit cards – shift cash to your bank account, with 0% interest
A few specialist cards offer a 0% money transfer that lets you pay cash into your bank for a small fee. You then owe the card instead but interest-free, which is usually much cheaper than loans for amounts under £3,000.
This can win if you need to borrow but the retailer doesn't accept cards, or if you're paying interest on an existing loan or overdraft – as you can use the cash to pay these off. Crucially, to get the cheap rate never just take cash from an ATM. You'll need to ask your card provider for a money transfer.
See top picks in our money transfer credit cards guide, or check your acceptance odds using our eligibility calculator.
Golden rules for 0% money transfer cards
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Clear the card or transfer again before the 0% ends, or the rate soars to typical 21% to 24% interest rates, though it can be much higher (see APR examples).
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Never miss the min monthly repayment, or you may lose the 0%, get hit with a £10ish late fee and get a credit report black mark.
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Don't spend or withdraw cash – it usually isn't at the cheap rate.
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You must usually transfer within 60 or 90 days to get the 0%.
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Important. Money transfers are for those who can meet repayments. If you're struggling, check our Debt help guide for alternative options.
Credit building cards – if you have no (or poor) credit history
Credit building credit cards are designed for those with little or bad credit history. When used for normal spending and paid off IN FULL every month, they can help build (or rebuild) your credit score.
See top picks in our Credit cards for bad credit guide, or check your acceptance odds using our eligibility calculator.
Golden rules for credit building cards
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Clear IN FULL each month or you'll pay hefty interest, which can be as high as 60% APR (see APR examples).
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If you can't clear in full, ensure you never miss the min monthly repayment or you'll get a £10ish late fee and a credit report black mark.
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Never go over your credit limit or there's a £10ish fee.
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Never withdraw cash – repeated cash withdrawals on a credit card are a red flag to lenders plus it's expensive as there's usually a 3% or £3ish charge and interest from day one, often at an even higher rate than spending.
Which credit card is best?
The best credit card depends on what you need it for. Some are designed to cut existing debt, while others are better for planned spending, rewards, travel or building your credit history.
Paying interest on existing credit or store card debt? Look at a 0% balance transfer card, or an all-rounder card if you also need 0% spending.
Do you spend on a card and always repay it IN FULL? If so, make it pay you £100s a year with a reward credit card.
Do you spend on a card, but can't always repay in full? If so, you need a 0% spending card.
Do you travel abroad or pay online in overseas currency? If so, specialist travel cards offer near-perfect exchange rates.
Do you need to borrow for a purchase but can't pay on card, or want to get respite from an expensive overdraft? If so, a 0% money transfer card can help.
Do you have a poor credit history or are new to credit and struggle to get accepted? A credit rebuilding card could help.
Credit card FAQs
Should I pay off my credit card in full every month?
Yes, unless you’re on a 0% deal. Paying your credit card off IN FULL each month means you’ll usually pay no interest on purchases.
If you leave even a small amount unpaid, interest is usually charged on the full statement balance until it’s cleared. This is especially important with reward or airline cards, where interest can quickly wipe out the value of any cashback, points or air miles.
If you do have a 0% card, make sure you clear it before the 0% period ends, and always make at least the minimum monthly repayment.
How do I dispute a credit card charge?
First, contact the retailer and ask it to refund or fix the issue. If it refuses, you may have two routes through your card provider.
For many credit card purchases costing over £100 and up to £30,000, Section 75 protection means your card provider may be jointly liable if something goes wrong.
For other disputes — for example, if you’ve been double-charged, don’t recognise a payment, or Section 75 doesn’t apply — you may be able to use the Visa, Mastercard or Amex chargeback scheme. Chargeback claims usually need to be made within 120 days, so act quickly.
What happens if I miss a credit card payment?
If you miss at least the minimum monthly repayment, you could be charged a late fee, lose any 0% rate and have a missed payment recorded on your credit file.
Missed payments can stay on your credit file for up to six years and may make it harder or more expensive to get credit in future. Set up a direct debit for at least the minimum repayment to reduce the risk.
Can I get a credit card with no credit history?
It can be harder, as lenders have little information to judge whether you’re likely to repay. But some cards are designed for people with little, poor or no credit history.
Used carefully – staying within your limit and paying on time – a credit-building card can help improve your creditworthiness.
How do I cancel a credit card?
Before cancelling your credit card, pay off any remaining balance, cancel regular payments and use any reward points you don’t want to lose.
Then contact your card provider to close the account. This can usually be done online or via its app, but it’s worth emailing or writing too, so you have confirmation of the request and your cleared balance.
It can take up to 60 days for a card to be cancelled, though this varies by provider. Once it’s done, check your credit report to make sure the account is marked as closed.
How does a credit card affect my credit score?
A credit card can help or harm your credit score, depending on how you use it. Paying on time and not borrowing too much can help show lenders you’re a responsible borrower.
But missed payments stay on your credit file for six years and can hurt your chances of getting credit in future.
Applications can also affect your credit file, especially if you make several in a short time or are declined. Use our eligibility calculator first to check your chances without it going on your credit file.
You can also sign up to MSE’s Credit Club to see how the financial world views you.
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