How do credit cards work?

A credit card is a flexible way to pay for anything from a holiday to a washing machine. You borrow the money, so it allows you to spread the cost of your purchases over time through monthly repayments.

What is a credit card?

You can use a credit card to buy goods online and pay for products and services in shops, restaurants and hotels.

You borrow the money from the credit card issuer and pay it back either in full or in monthly instalments. If you don’t repay in full, you’ll also be paying interest (a percentage of what you owe). You’ll have a minimum payment which you have to make, but it’s best to repay in full or as much as possible so you reduce the time it takes to repay the debt and also how much interest you’re charged.

You’re able to spend up to a certain amount on the credit card, known as your credit limit, and your credit card issuer will send you a bill every month with a list of all your transactions.

How do interest rates work?

If you don’t pay off your credit card balance in full after receiving your bill each month, you’ll be charged interest on what you owe.

Some cards offer a 0% introductory interest rate for a certain amount of time when you first get the card. However, once that period is over you will start to be charged interest if you don’t pay the full balance every month.

Why use a credit card?

There are several advantages to having a credit card as long as you use it responsibly. You can:

  • Spread the cost of big-ticket items - Want to book a holiday or buy a new sofa? You can make a purchase and then repay the balance over the course of several months.
  • Get purchase protection - Under Section 75 of the Consumer Credit Act, you’re protected if you buy anything that costs more than £100. If something goes wrong, such as the goods being faulty or the company you bought from going bust, you could get a refund.
  • Build your credit rating - Having no credit history means that banks are unable to assess how well you can manage debt. A credit card can help you build up a good track record of paying off debt to show lenders you’re responsible when it comes to applying for larger loans like a mortgage.
  • Prepared for emergencies - A credit card can help cover repairs or unexpected expenses instead of taking out a loan.

A few things to consider

Before you apply for a credit card, there are some key things to think about:

  • Your spending habits - If you’re planning to pay off your bill in full every month, the interest rate may be less of a concern to you, so you could consider a credit card with the lowest annual fee. If you’re going to carry a balance, however, it may be worth looking for a card with the lowest possible interest rate. Keep in mind that you don’t want to be setting yourself up with long term debt – so carrying a debt indefinitely is not what a credit card should be used for.
  • Fees and charges - Some credit cards charge an annual fee. You could also be charged a fee if you go over your credit limit, use your card abroad or make a late payment. This could harm your chances of getting credit in the future.
  • Annual Percentage Rate (APR) - APR is the way lenders describe the cost of borrowing money over a year – taking into account the purchase interest rate and fees associated with a credit card. When comparing credit cards you can look at the representative APR to get an idea of how much a credit card could potentially cost you.

How to apply for a credit card

You can apply for a credit card if you’re over 18, a UK resident and have a regular income, typically of at least £8,500 a year before tax.

Some credit cards may have additional eligibility requirements, for example HSBC’s Premier Credit Card is only available to HSBC Premier Customers. Before applying for any credit card make sure you’re familiar with the terms and conditions as well as the eligibility requirements as an application that’s refused may impact your credit score.

You may be able to apply online and then the credit card provider will check your credit history to see if you’re a suitable candidate. The better your credit score is, the more likely you are to have your application accepted.

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