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How do credit cards work?

When you’re new to credit cards, they can feel overwhelming. But we’re here to clear up the confusion and explain the basics of how credit cards work.

11 October 2022Helen Tippell 4 min read
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Image by Clay Banks on Unsplash

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A credit card lets you buy things from a pot of money you borrow from a bank, building society or other lender. The lender will then send you a bill – or statement – every month and you’ll need to pay back the money you’ve spent.

When you use a credit card, you’re borrowing money. Every month, you’ll be sent a statement from your lender – it’ll show you the total amount of money you need to pay back (the closing balance) and the due date.

They’ll also tell you what the minimum payment is.

It’s a good idea to pay back the full amount so you don’t have to pay interest, but if you can’t afford to pay your credit card you could make the minimum payment.

All credit cards come with interest rates. It’s the money lenders charge you if you don’t pay your bill on time and in full. You’ll know what it is during the application process and usually see it as an APR (annual percentage rate).

That’s why it’s important to budget and pay off your monthly credit card statements in full and on time. Otherwise, interest rates can be applied, and you’ll end up paying back more than what you used.

Sometimes, a credit card comes with a promotional offer – like 0% interest for a few months. It would usually be on an introductory offer for new users and can be a safety blanket while you get used to credit cards. But, if you choose a credit card with an offer, make sure you understand what rates will be applied when that promotional period is over.

Your credit card will come with a limit – it’s the maximum amount of money you can use at any one time. Generally, it’s recommended that you use somewhere between 10% and 30% of your credit limit a month.

Remember: you have to pay back whatever money you use.

How much you use is called ‘credit utilisation’. Using less than your total credit limit, and paying it back on time and in full, can help you in the future. That’s because you’ll have a track record of paying back money responsibly. So, if you want another credit card, loan or car finance, for example, you could see better offers.

To apply for a credit card, you need to be a UK resident and at least 18 years old. You usually need to share additional information like your income, address and proof of ID.

If you apply for a credit card online, you could find out if you’ve been approved within a few minutes. Applying at a branch might take longer.

Once you’ve been approved, you’ll get your credit card in the post – it can take about two weeks, and you can use the card as soon as you activate it.

When you apply for a credit card, lenders perform a credit check, also known as a hard search. Lenders want to be sure that the person they lend money to can afford any repayments. So, they search your credit report to see how well you manage money and if there are any negative marks, like debt, on there.

A hard search can have a negative effect on your credit score, but if make your repayments on time and in full, the impact should be short-term.

Your credit score is number out of 1000 that – combined with your credit report – helps lenders understand how you manage money.

It’s made up of things in your credit report, like the number and type of accounts you have, how much of your available credit you’ve used, your payment history and the length of your credit history.

The way you use your credit card (how much of your limit you use, how you pay it back, how often you apply for a credit card) has an impact on your score. There are several ways a credit card can affect your credit score.

You need to meet certain requirements to get a credit card, so understanding how different factors affect your chances is key. If you can’t get a credit card, have a look at the possible reasons why.

Keep reading for some of the most common credit card questions.

How much can you borrow?

Your credit limit is determined by everything that makes up your credit score. A good score could mean better offers – that’s because a good score suggests you have a history of paying back money responsibly. And lenders are more likely to trust you with a higher credit limit.

Remember: always make sure you can afford repayments.

What happens if you miss a payment?

If you miss a credit card payment, there are things you can do to get yourself back on track.

How will you be charged when you use a credit card?

Your lender will send you a credit card statement (bill) every month. You’ll need to pay back what you owe – or the minimum payment – by the due date shown in the statement. You can do this by transferring money from another account or by setting up a Direct Debit.

The payment due date is the same every month (depending on bank holidays and leap years), and sometimes it doesn’t work for your budget. You’re likely to want to have a payment due date after your payday – you can speak to your lender and ask if they can change the date.

Can you use your credit card abroad?

Most credit cards can be used abroad, and they can be a great alternative to carrying cash. Check with your lender if there are fees you should be aware of (like non-sterling transaction fees, cash withdrawal fees, interest rates or exchange rate fees).

What’s the difference between a credit card and a debit card?

Debit cards let you take out money directly from your bank account, whereas credit cards let you borrow money. Some debit cards do come with an overdraft but that tends to be less than a credit card limit and the interest rate could be higher.

Next step: Start comparing credit cards with ClearScore, today.


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Written by Helen Tippell

Digital Copywriter

Helen's our resident Digital Copywriter. She makes personal finance easier to understand so you can be ClearScore sure about your choices.