A credit card is a way for you to pay for a range of products and services by borrowing money from your card’s provider. Unlike a debit card, where you use your own money, a credit card provides you with funds on the understanding that you will pay back at least a regular minimum sum.
Apply for a credit card and you’re saying you agree that you can borrow money from a lender and in return you will pay at least a set minimum amount back on time each month.
The price of this convenience is the interest you are charged by the credit card provider – although if you repay the balance in full each month and within the agreed time, you shouldn’t be charged interest.
Not everyone is accepted for a credit card. Different lenders have different criteria they look for in their borrowers. For example, a lender who offers a credit card with a £10,000 limit and multiple rewards is unlikely to accept a borrower on a low income and with a limited credit history.
And if you have a very poor credit score, you may not be accepted for a credit card at all.
The credit card you successfully apply for will have a set spending limit on it. You may be able to spend over this limit, but if you do you may be liable for a fee.
The card may come with extras like cashback, shopping and fuel loyalty points or air miles. These added benefits may be what sways you to choose one card over another.
Once you have your card, you are free to spend with it – up to the set limit. Each month, your lender will send you a statement which, much like with a bank statement, will set out what you have spent and how much you owe.
"Charge cards have no spending limit or interest rate, but you must repay your full balance every month."
A charge card could provide you with an alternative to credit cards. Charge cards have no spending limit or interest rate, but you must repay your full balance every month.
So while it can be an economical way to spend, you must be certain that you’ll be able to pay it back on time. If you don’t think you’ll be able to do this and would prefer to spread out your repayments, a charge card may not be the best option for you.
As well as the possibility that your card will provide you with rewards like the ones detailed above, it also offers additional protection to you as a buyer.
Under Section 75 of the Consumer Credit Act 1974, any purchase you make worth between £100 and £30,000 is protected by your card provider. This means that if the item is damaged, faulty or never turns up, your lender must refund what you paid – and you don’t have to worry about paying for something you’ve been unable to use.
This makes credit cards particularly useful for online shopping. While you can shop online using a debit card, if there’s a problem with your item you will have to rely on the seller to provide a refund. With a credit card, both the seller and your lender are responsible for making sure you’re not out of pocket.
Mobile App
Manage your account online or on your smartphone anytime
Contactless
Pay for up to £30 worth of items quickly and securely
60 second QuickCheck
See if you’re eligible before you apply
39.9% APR
Representative
(variable)
You have several options when it comes to paying off your credit card each month: you can pay the minimum payment charge; the full balance; or what you can afford that month (providing it’s above the minimum).
While it’s possible to just meet the minimum repayment every month, this is not the most economical idea.
Minimum payments are typically very low, which can make it tempting to choose not to pay any more than this. However, this charge does not just cover money you have spent but also the interest and any fees.
As a result, it could take you years to clear your balance at this rate – and you may end up spending hundreds or even thousands of pounds in interest.
"...Always do your best to pay back your credit card balance in full every month. That way, you are unlikely to pay any interest at all."
Always do your best to pay back your credit card balance in full every month. That way, you are unlikely to pay any interest at all.
It also means you don’t have to worry about the debt hanging over your head. You may have to manage your spending so that you know you can afford to pay in full every month, but this careful budgeting could make your credit card cheaper to use and may also improve your credit rating.
If you’re unable to pay your balance in full, try your best to pay more than the minimum charge. You may have the flexibility to set up a Standing Order for an amount you can afford to go towards your credit card every month so you know you’re making steady progress to clear the debt as soon as possible.
What if you don’t make any repayments at all towards your credit card debt? This could wind up not only being expensive, but could also make it difficult for you to borrow again.
If you don’t pay at all or pay less than your agreed minimum repayment, this is classed as a missed payment. Doing this just once could result in your lender imposing a late payment charge, which will be added to your balance. You may also forfeit any special interest rate you had previously been enjoying. Many credit card lenders also charge a fee for late or missed payments, which is capped at £12 per instance.
Should you miss a few more payments, the interest you owe will start to pile up. This will make it far more expensive to clear the balance. Missing these payments will also result in damage to your credit score, which could show up on your report for years and make borrowing during this time very difficult.
If you find yourself in a position where you’re unable to pay off your credit card balance at the agreed minimum rate, you should make an effort to speak to your lender as soon as possible and come up with an alternative arrangement.
However, if you use your credit card correctly and make an effort to clear the balance in full every month so you’re not charged interest, you could find it’s a great tool to have in your wallet. Not only will you enjoy your lender’s protection when you spend as well as any rewards they offer, but by using it responsibly you’re also helping to improve your credit rating – potentially opening yourself up for some of the best deals on the market when you borrow again.
