Used well, a credit card is a secure, flexible way to pay. It can be a good way to borrow money to spread the cost of major purchases and comes with section 75 protection. But if you only make minimum payments or run up a bill you can’t pay back they can be costly, making it easier to spend more than you can afford and could lead to debt.
How a credit card works
A credit card allows you to spend money up to a pre-set limit. You’ll get a bill for what you’ve spent each month.
It‘s important to try to pay off the balance in full every month. But you’ll need to pay off at least the minimum amount. The minimum is set by your credit card provider, but must be at least 1% of the outstanding balance, plus interest, any default charges and the annual fee (if there is one). Most of the time it will be between 3 and 5%. It might also be set as a pound figure of at least £5.
If you pay off the bill in full, you won’t pay any interest on what you’ve borrowed unless you've used your credit card to withdraw cash. If you don’t pay off the bill in full, you’ll be charged interest. Interest is usually backdated to the date of your purchase.
If you’re worried about forgetting to pay, you can set up a Direct Debit. This is if you can rely on enough money coming into your bank account on the same date each month. This will mean you don’t miss a payment.
Make sure a credit card is right for you
If you already struggle with managing your money or think you might be tempted to overspend, it’s important to avoid getting a credit card. Find out more about managing credit well.
Are you confident about managing your spending and being able to clear your balance every month? Then a credit card can be a good way to buy what you need now and pay for it each month.
If you’re facing higher living costs, find out about extra sources of income and support in our section Help with the cost of living.
Pros and cons of borrowing on credit cards
Pros
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Easy to carry and use – credit cards are accepted at more places than charge cards and prepaid cards.
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Safer than cash – if your card is lost or stolen, just call your bank and cancel it. If it’s stolen and used fraudulently, you’re more likely to get the money back.
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Might be a cheaper way to borrow – if you pay off your balance in full each month, you won’t pay any interest. Some cards offer an initial interest-free period on purchases. But be aware of when this period ends and if any kind of spending doesn’t count during this time.
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You’re protected – under something called section 75, you’re protected for most purchases over £100 and up to £30,000. For example, if you book a holiday and the provider goes out of business, the card company should cover the cost even if you only paid a deposit by card.
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Freebies – these often come with credit cards, such as air miles, reward points and cashback. But it’s important to never choose a credit card because of these benefits.
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Can help your credit score – sticking to your credit limit and paying your credit card balance in full each month can improve your credit rating. But missing even a single payment can damage your credit record.
Cons
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High-interest payments – if you don’t pay your balance at the end of each month (and you’re not on a 0% deal), you’ll have to pay interest on what you owe. This can be a lot more than other forms of borrowing.
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Beware of debt building – miss just one payment and the interest will start to add up. Unless you pay off what you owe each month, your debt can build up.
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Can damage your credit score – if you miss a payment or go over your credit limit. This can affect your ability to borrow money in the future.
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Extra fees – as well as the interest, you could find yourself paying more fees or penalties for exceeding your credit limit or missing a payment. You’ll usually have to pay a higher rate of interest for withdrawing cash and some credit cards might also charge an annual or monthly fee.
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Deposits and pre-authorisations can cut into your credit limit – some places, such as hotels or car rental firms, might use your credit card to take a pre-authorisation. They’ll put a hold on part of your credit limit – say, £500 – and while it’s in place that amount of credit won’t be available to you. Even after they remove the hold, there might be a few days’ wait until your credit limit is back to normal.
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Expensive to use abroad – depending on the card. Some are designed for travellers, while others are more expensive when it comes to fees and other charges. This depends on whether you use the card for purchases or cash withdrawals. Shop around to find the best rate cards to use abroad. There’s a range of travel credit and debit cardsOpens in a new window to consider at MoneySavingExpert.
What you need to know before applying for a credit card
You need to be aged at least 18 to apply for a credit card. With some cards, the minimum age is 21. Here are some useful things to know about credit cards.
Credit checks
Banks and other lenders use your report to find out about your credit history by doing what are called credit checks. There are two types of credit checks when applying for a credit card – hard and soft.
They use this information to find out what your credit score is.
You can check your credit score for free by using MoneySavingExpert Credit ClubOpens in a new window, Credit KarmaOpens in a new window or ClearScoreOpens in a new window
Top tip
If you want to rebuild your credit score, you might want to consider a ‘credit builder card'Opens in a new window
It’s worth checking with each of these, as the information they hold on you can be different as they’re each based on data from different credit reference agencies.
How to apply for a credit card
If you think a credit card is right for you, it’s a good idea to check your eligibility first. This will give you a better idea of whether you’re likely to be accepted for certain cards and won’t affect your credit score.
Ways to apply
There are various ways to apply for a credit card. You can apply online (either via a comparison site or directly), in-branch, or take a form and post it back.
By law, you must be given pre-contract credit information in a standard form and a credit agreement to sign – either electronically or on paper. You must also be given an explanation of the key terms and risks, so you can understand what you’re taking on. If in doubt, ask questions.
If there are FAQs on the website that don’t cover any questions you have, ask the lender directly.
Applying might affect your credit rating
If you’re shopping around and comparing various credit offers, make sure you don’t apply for credit until you’ve decided on the best deal. This is because every time you make an application for a credit card, it’s noted on your credit report and might affect your credit score.
If you make too many applications, or your applications are refused, it might suggest you’re struggling financially. This can damage your credit rating, which might mean other lenders reject your application or increase the interest rate they offer you.
Also, if you’re offered a quote, check whether this is guaranteed. Some quotes might just be indications of likely eligibility or price. Most lenders will reserve the right to change their mind if they receive new information about your finances.
If your card application is refused
If the lender rejects you based on a credit check, they must tell you and give you the contact details of the credit reference agency they used.
You can then apply to the credit reference agency for a copy of your credit report. If your credit application was declined it might be worth asking the lender why – some might tell you. If there’s something incorrect on your credit report, contact the credit reference agency and, if necessary, the credit provider to get it put right.
Find out more in our guide What to do if you’re refused a loan or credit card.
Charges and fees
It’s important to be aware of all the ways you can be charged when using credit cards.
Watch out for interest rates when borrowing
As a new customer, you might get an introductory rate when you first get the card. But check whether this covers purchases or balance transfers, or both. Remember, it won’t cover cash withdrawals.
Also, check what the interest rate will be once the introductory period is over and make sure you repay in full before then if you can.
Fees for transferring to another card
If you’re transferring a balance from another card, you’ll usually be charged a fee, often around 2-4% of the amount transferred.
You need to work out whether it’s worth paying this in order to benefit from a lower interest rate on the card you’re transferring to.
Late payments damage your credit rating
If you make your payment after the monthly deadline on your statement, you’ll have to pay a late payment charge. Any 0% or other introductory rate could also be withdrawn. Plus, other companies will see you were late paying as part of your credit record.
This could have a negative impact on future credit applications, such as applying for a mortgage or a car loan.
Cash withdrawals cost money
When withdrawing cash with a credit card, your card provider will charge you a minimum amount or a percentage of your cash withdrawal if you take money out from any type of cash machine.
You might not be told about this before you take out the money. You’ll also start being charged interest by your card provider straight away, even if you pay it all off before your bill is due.
The same often applies to other transactions that could be treated as cash – such as transferring some of your balance to current accounts, using a credit card to buy foreign currency or gift cards, or for gambling transactions. It’s always best to ask your card provider.
