Credit Cards - How Do They Work?

Updated: May 2, 2020

The older we get, the more conversations we hear regarding credit cards. They may be from your work colleagues talking about the credit card they've just applied for, or from your parents who tell you to steer clear. We're going to give you the complete lowdown on credit cards so you can be in the know and make a decision to best suit you.

Credit Card - a plastic card issued by a bank which allows you to make purchases on credit

You can apply for a credit card either online directly on a providers website or in branch. When you make an application, the limit and interest rate that you are offered is decided by your credit score and how much credit you already have out in your name (eg. existing loans, credit cards, overdrafts etc). The limit on a credit card determines how much you are able to spend on credit.

Once you have received your credit card, there is a possibility for you to request a higher limit or your provider may contact you to offer a higher limit. Whether or not you'll be accepted for an increase in your credit allowance depends on your credit score are use of your current credit levels (eg. have you missed payments etc).

Credit cards have an interest rate which is the amount you have to pay to the issuer in return for using the credit facility. Interest rates on credit cards tend to range from 0% to 39.9% but can sometimes be higher if you have a poor credit score. Interest is accrued and is added to the remaining balance on your credit card.

There is an interest-free period on credit cards whereby if you make a purchase and repayment the balance in full within that period, you will gain no interest on your balance. The typical interest-free period for the majority of credit cards is 30 days however, this period can be between 20-55 days with some providers. Be sure to contact your issuer to clarify when your interest-free time period is.

Any balance that remains on your credit card after this period will incur interest. This interest will be calculated and added on to your next credit card statement. Some providers offer 0% interest credit cards which mean that if you make any purchases, you will incur no interest during the entire 0% interest period.

For example, if your 0% interest credit card period is 9 months and you purchase a phone for £800, you will incur no interest on the balance during that time.

As beneficial as they are, 0% interest credit cards are not available to everyone and is dependent on your credit eligibility. Use the calculator below to see what you're eligible for:

Every month, you'll receive your credit card statement detailing all of the purchases made over the previous month either electronically or through the post. It will also state how much the minimum payment is, when the payment is due and how much interest will be added to your existing balance. It is always in your best interest to pay more than the minimum payment stated as it will reduce the time it takes to repay the balance in full meaning you'll repay less over the long term in interest.


Cost Spreading - One of the biggest advantages of using a credit card is being able to spread the cost of an expensive item over a period of time. Credit cards are great especially in emergency situations where, for example, your boiler has stopped working and needs urgent replacing. If you don't have the cash upfront to make that purchase, you can pay for it on a credit card and make repayments over a number of months.

Purchase Protection - Under section 75 of the consumer credit act, any purchases between £100 - £30,000 made on a credit card is covered. This means that if you were to purchase an item using your credit card and the item were to go faulty, the credit card company are jointly liable with the retailer to fix the problem. If I were to purchase a laptop and it stops working after a month, I'd first contact the retailer I bought it from. If, for some reason, they refuse to fix the situation or issue a refund, I can contact my credit card company and they'll follow up the problem and figure out a solution. It doesn't matter how expensive the item is, as long as you pay at least £100 of the total value using your credit card, your full purchase will be covered. If I bought a car for £5,000, put £100 of it on my credit card and paid the remainder in cash, the full value of my car would be covered.

Rewards - some credit cards offer additional perks such as points when travelling (eg Avios points) or cashback on your purchases. These can be great if you're a frequently traveller or want to save money on your purchases.


Possibility of Debt - As for all credit facilities, 'with great power comes great responsibility' and sometimes it can be easy to get carried away with the illusion of extra cash. If you're going to use a credit card, make sure you do so responsibly. Some credit cards have high interest rates and may put you in a bad financial position if not managed properly.

Fees - If you end up making a late payment or even missing payments, you could end up paying higher fees than expected. Late payment fees will be added to your statement as well as the interest rate. Make sure you clarify all of the fees associated with your credit card.

Affects Credit Score - Whilst credit cards can be effective credit builders when repaid on time, if you miss payments then you could actually see your credit score decrease. Be mindful when getting a credit card and set up a direct debit to pay your credit card to ensure you never miss a payment.

Ultimately, credit cards hold a lot of benefits when used correctly so ensure you do your necessary research before applying.