How do credit cards work and which one is best for me?

19 min Read Published: 23 Jun 2020

How do credit cards work?There are several different types of credit cards and so it is important to consider your options before deciding which is right for you. In this article we look at how each different type of credit card works and how to establish which one best meets your needs.

What is a credit card and how do they work?

Credit cards allow you to borrow money up to a certain limit as decided by your credit card provider. Often this limit will be a few hundred or few thousand pounds. You then pay back the amount borrowed either in full or in monthly instalments. There will always be a minimum amount you need to pay back each month, but you can pay more than this if you wish to. If you don’t pay off the amount in full you will pay interest, unless you have a credit card that offers an interest-free period for a set number of months.

Information required when getting a credit card usually includes your name and address (you may need previous addresses too), date of birth, your annual income, email address, phone number and your bank details. You often don’t need to provide identification documents, but in some cases you might be asked for a copy of your driving licence, passport, bank statement and utility bill.

Is a credit card right for me?

If you are choosing a credit card for the first time, it is important to consider exactly what you need it for in order to work out which credit card is right for you. For example, if you want to make a large purchase but are not sure how you will pay for it, some credit cards allow you to spread the cost of your spending over several months interest-free. Credit cards also offer purchase protection under Section 75 of the consumer credit act, which means if you have spent over £100 and not more than £30,000 and there is a problem with your purchase, you can claim your money back. Find out more in our article ‘Section 75 of the consumer credit act explained’.

Credit cards can also be a useful tool for helping you to consolidate existing debt. Some credit cards, as we will explain later, allow you to move over debt from existing cards and pay less in interest, helping you to clear your debt quicker and more cheaply. You can also choose from cards that allow you to earn cashback and other rewards, cards that can help you rebuild your credit score, and cards designed specifically for overseas use.

Should I get a credit card or a personal loan?

Before taking out a credit card, another option you might want to consider is a personal loan. Generally-speaking, personal loans are better if you want to borrow a large sum of money, perhaps to fund important home improvements. Personal loans typically allow you to borrow more than a credit card and can also be useful if you want to stick to a budget as monthly payments are fixed. However, interest rates will vary depending on the amount you borrow, as well as your credit score, so it is important to make sure you can afford the monthly payments before you apply. You can learn more in our article ‘Is it better to get a credit card or personal loan?’

What are the different credit card types?

To help you decide which credit card is right for you, below we have outlined how each type of credit card works and who they are best for.

  • Purchase credit cards - Purchase credit cards are best suited to those who have a large purchase coming up and need a bit of breathing space paying it off. If you choose a 0% purchase credit card you can avoid paying interest on your balance for a number of months, which means all of your monthly repayments will go towards paying off your balance, helping you to clear it quicker. Be aware, however, that some 0% purchase credit cards require you to carry out your spending within a set number of days, and once the 0% period ends you will start paying interest. It is therefore best to clear your balance before the interest-free offer is over. Also note that the best deals are only offered to those borrowers who have an excellent credit rating, so if yours is not up to scratch you may not be offered the interest-free period advertised or your application could be rejected. You can find more information on purchase credit cards in our article ‘Compare the best 0% purchase credit cards’.
  • Balance transfer credit cards - If you have an existing debt to clear, you could consider using a balance transfer credit card. This type of card allows you to move existing card balances across and pay them off at a lower rate of interest, or in the case of a 0% balance transfer credit card, no interest at all for a set period. This can help you to pay off your debt more quickly and much more cheaply. Be aware, however, that you will usually have to pay a transfer fee and once any 0% deal ends, interest will kick in. If you haven’t cleared your balance before this point, you may find it is best to carry out another balance transfer to avoid paying interest. Many 0% deals also only apply to transfers made within a set number of days, ie 60, so check this before you apply, and the best deals will only be offered to those who have a good credit rating. You can read more about balance transfer cards in our article ‘Best 0% balance transfer credit card deals’.
  • Money transfer credit card - If you are paying off an expensive overdraft or personal loan, a money transfer credit card can help you clear it more cheaply. Money transfer credit cards allow you to transfer money from your credit card into your bank account and then use these funds for whatever you need. You could, for example, pay off your overdraft or loan or you could use the funds as a low-cost loan to make a purchase. You then pay back your credit card provider each month, just as you would with any other credit card. Some money transfer cards also offer interest-free periods, but again, you will usually have to carry out your transfer within a number of days. And like balance transfer cards, there is usually a transfer fee to pay - often around 4% of the total amount. Find out more in ‘A complete guide to money transfer credit cards’.
  • Reward and cashback credit cards - Even if you don’t need a credit card to help you spread the cost of a purchase or clear existing debt, they can still be beneficial as some offer rewards or cashback as you spend. Rewards could include loyalty points at your favourite retailer or airmiles that you can later put towards the cost of a flight. Cashback credit cards offer a certain percentage of your spend back, but the amount you can earn is usually capped. In some cases you may receive a higher cashback rate for the first few months. Be warned though that this type of credit card often comes with a high interest rate so only use one if you are confident you can pay off your balance in full every month. Some cards also charge annual fees so it is important to factor this in when comparing offers as they can quickly wipe out any rewards. Find out more in ‘Compare the best cashback and reward credit cards’.
  • Credit building credit cards - Credit building cards are designed for those who do not qualify for mainstream cards or who are trying to improve their credit score. By making your repayments on time and not going over your limit, you can gradually build up your credit score and ultimately you may be able to apply for a more competitive credit card. Be aware that credit building cards often have low credit limits, but they can increase if you make your repayments on time. Interest rates are also usually very high, so it is important to clear your balance each month. Find out more in ‘Compare the best credit cards if you have bad credit’.
  • Credit cards if you have existing debt - If you have existing debt it is worth trying to clear it before applying for more credit such as a mortgage. Balance transfer credit cards are a good option for helping you to consolidate your debt and pay it off more quickly, particularly if you choose one with an introductory interest-free period. That said, having existing debt doesn’t automatically mean you won’t qualify for a mortgage. But it can help to reduce it as much as you can. Read more in our article ‘Should I clear credit card debt before getting a mortgage’.
  • Travel credit cards - If you use a credit card on holiday abroad you can often get stung by fees. You will, for example, usually have to pay a foreign transaction fee every time you spend and this can be between 2.75% to 2.99%. On top of this, if you withdraw money on your credit card, you’ll pay another fee of around 2.99% and you’ll pay interest from the moment you withdraw your cash, even if you pay off the balance in full. Fortunately, there are a number of credit cards that are designed for overseas spending and won’t charge you foreign transaction fees or even cash withdrawal fees while you are away, but do remember that you will still be charged interest on cash withdrawals. Check out our article 'The best way to take money on holiday'.

Pros and Cons of credit cards


  • Some credit cards allow you to borrow interest-free - 0% purchase and 0% balance transfer credit cards allow you to avoid paying interest for a number of months. This can help you spread the cost of a purchase or help you clear existing debt more cheaply
  • You may be able to earn rewards or cashback as you spend, which you can then redeem on flights or at certain retailers
  • If you are going abroad, some credit cards can help you spend more cheaply
  • Credit card purchases are protected by Section 75 of the consumer credit act. If you buy something costing over £100 and not more than £30,000 on a credit card, the card provider is jointly liable with the retailer if something goes wrong
  • Payments are flexible so you can choose how much to repay each month (although it must be at least the minimum payment)
  • Using a credit card sensibly and keeping up with your monthly repayments can help improve your credit score.


  • Minimum monthly repayments are often low so it is best to pay more than this if you can
  • Interest rates can be high, particularly if you have a poor credit rating
  • Credit cards can encourage you to spend more and if you are unable to pay back what you owe, you risk building up more debt
  • Some cards charge an annual fee
  • You will be charged a fee if you miss or are late with a payment or go over your credit limit
  • Late or missed payments can also harm your credit score and you could lose any 0% offer you have taken advantage of

Things to consider before applying for a credit card

Before applying for a credit card, it is important to read the small print carefully and check the charges and fees that apply for missed payments or for going over your credit limit. If you are applying for a credit card with an introductory 0% offer, also check how much interest you will be charged once the deal ends. Make sure you will be able to afford the monthly repayments and have a plan in place for clearing your debt as quickly as you can.

Also bear in mind that the top credit card deals will only be offered to those with a good credit score, so if yours is not up to scratch, you may have to pay a higher interest rate or your application could be turned down. You should also only use a credit card for the purpose it is intended. So if you are using a balance transfer credit card, don’t also spend on it as you will build up more debt and you could be charged a higher rate of interest. Also avoid using a credit card for cash withdrawals. Not only will you be charged a fee, you will also have to pay interest from the day you make the withdrawal, even if you pay off your balance in full that month.

If you are struggling with credit card debt, read our article ‘The 5 simple steps to clear your credit card debt’.

Credit card jargon explained

If you are applying for a credit card, watch out for the following jargon and make sure you understand what it means:

APR: This stands for Annual Percentage Rate and is the official rate used for borrowing. It takes into account the interest rate as well as any other fees or charges in order to make comparison easier.

Minimum repayment: All credit cards have a minimum amount that must be paid each month. Typically this is very low - often between 1% to 3% of the balance - so it is best to pay off more than this if you can.

Annual fee: Some credit cards charge a fee each year, particularly those that offer rewards, cashback or other perks, so always check if this is affordable and worth paying.

Introductory interest rates: Some credit cards might offer a lower interest rate, or even no interest at all, for a set number of months. However, it is important to know what interest rate you will be charged once this initial period is over.