What are the different types of credit cards?
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Here are the main different types of credit card available in the UK:
Purchase credit cards
A purchase credit card is a type of credit card designed for making everyday purchases and one-off big spends. Once you buy something with the card, the cost of that purchase will go onto your card balance. If you pay the card off by the end of the billing period, you will not pay any interest on that purchase. Some purchase credit cards come with an introductory 0% period, which means you can spread the cost of a purchase over a number of months without paying any interest.
The main benefit of a purchase credit card is delaying having to pay for what you buy with the card and – if you have an interest-free period – spreading the cost of a purchase. It can also be useful if you have an unexpected one-off expense, as you can pay on your credit card and then pay off the balance once you have the cash available.
The main disadvantage of a purchase credit card is having to pay interest on your spending. This will not be a problem if you clear the card balance before the end of the billing period or before any 0% term ends. However, the interest rate at the end of the 0% period is likely to be quite high. If you have not cleared the card by this point, you could end up paying a significant amount of interest.
Head to our ‘Compare the Best 0% purchase credit cards’ page to find the best deals.
Balance transfer credit cards
With a balance transfer credit card, you can move your current credit card debts onto the new card. If the balance transfer credit card has a low rate – some come with a 0% period – you can save a significant amount of money on interest, while also consolidating your debt. Debt consolidation can help you clear any debt you owe more quickly by simplifying the repayment process. Most providers will only offer the best balance transfer credit cards – and the lowest rates – to applicants with a strong credit history.
Your provider should be able to transfer the balance from your existing credit card or credit cards as soon as your new card is approved. Keep in mind that you may need to pay a percentage of the balance transferred as a fee. Most credit card companies charge between 2% and 3%. Make sure to weigh up this expense against the cost of sticking with your current credit card when you consider a balance transfer provider.
Once the balance is transferred, you can close your old accounts and focus on repaying your newly consolidated debt. If you have a 0% period on your new card, make sure to clear the balance before this expires.
You can find the best deals on balance transfer cards in our article ‘Best 0% balance transfer credit card deals’.
Cashback and rewards credit cards
By using a cashback and rewards credit card you can essentially earn as you spend. You might be earning loyalty points, air miles, rewards or have cashback credited back to the card. Loyalty points and air miles will usually be redeemable through a specific retailer or supplier, depending on which card you choose. Cashback is usually paid as a percentage of your spending, though some cards will have a tiered system that means you earn a higher percentage if you cross a certain spending threshold.
The premise of these cards is that the more you spend, the more you earn. This creates the danger that you could be tempted to spend money to earn rewards, even though the rewards are unlikely to be worth more than what you have spent to get them. You may also find the provider charges an annual fee for the card, which can eat into the value of the rewards.
Do not expect a reward or cashback card to come with a particularly a low interest rate and keep in mind that you will need a good credit history to qualify for one. If you have a good credit history, always repay your balance in full at the end of the month and want to earn a bonus from your spending, a cashback or rewards card could work for you.
Check out our ‘Compare the best cashback and reward credit cards’ to find the best deals.
Money transfer credit cards
Money transfer credit cards allow holders to transfer credit from the card to a current account as cash. You will be charged a fee, but it will usually be less than the cost of withdrawing cash on a standard credit card. Once you have transferred the cash over, you are free to spend it how you please, without the restrictions that usually come with making purchases on a credit card.
While there is an advantage to being able to access cash over credit, there will be a one-off fee for the transfer. You may also have to pay interest, though some cards come with an introductory 0% period. It is best to make sure that what you are buying definitely cannot be paid for with a standard purchase credit card before you consider a money transfer credit card.
The best use of a money transfer credit card is likely to be consolidating debt. If your debt is on a credit card, your best option is a balance transfer credit card. However, if your debt is an expensive overdraft or payday loan that cannot be cleared using a purchase credit card, a money transfer credit card can help you consolidate your expensive debt.
We go into more detail on money transfer cards in our article ‘A complete guide to the best money-transfer credit cards’.
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