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How does a credit card work?

A credit card allows you to buy things now, and pay for them later – either in full to avoid paying interest, or in monthly instalments.

You’re able to spend up to a certain amount on the credit card – known as your credit limit

You’ll get a monthly statement from your credit card provider, which lists your transactions. And, if you’ve spent money on the card, you’ll have a minimum amount you need to pay towards your balance each month to avoid credit card charges.

What is credit card interest?

If you don’t pay off your credit card balance in full after receiving your statement each month, you’ll be charged interest. The interest will be calculated as a percentage of the amount you owe. 

Some cards, such as balance transfer credit cards, offer an interest-free period when you first get the card. However, once that period is over you'll start to be charged interest if you don’t pay the full balance every month.

There are some transactions, such as cash withdrawals, which you may still be charged interest on, even if you repay your balance in full each month. Always check your credit card terms and conditions to see what types of transactions you’ll be charged interest on. 

Explore: What is a 0% interest credit card for?

Advantages of using 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 a large or expensive purchase

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. This is where a card with an interest-free purchase period can come in particularly handy – if you can pay off the balance during that period, you won’t pay any interest at all.

Get purchase protection

Under Section 75 of the Consumer Credit Act, you may be protected if you buy anything that costs between £100 and £30,000. This means, if something goes wrong (such as faulty goods, or if the company you’ve purchased from closes down), 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 your credit score and create a good record of paying off debt – as long as you make at least the minimum payment each month and stay within your credit limit. 

When it comes to applying for larger loans like a mortgage, this can help prove you're responsible. Your credit score may be harmed if you don’t keep to the terms of your credit card agreement.

Explore: 5 reasons to care about your credit score

Prepare for emergencies

Although it’s a good idea to build up an emergency fund, a credit card can help cover repairs, or unexpected expenses should something happen.

Things to consider before you apply for a credit card

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

How you'll handle temptation

With a credit card you may be able to spend more than you’re comfortable with. Before taking one out, consider how you’ll handle any temptation and whether it’s the right option for you. If you decide it is, then you could set yourself some rules for spending. These can be simple things such as to only spend within a certain amount each month, or to only use it for emergencies or big purchases.

Your spending habits

If you’re planning to pay off your balance in full every month, the interest rate may be less of a concern to you.

But if you’re going to carry a balance, it may be worth looking for a card with the lowest interest rate available. 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.

Explore: Tips for using your credit card

Credit card fees

Some credit cards charge an annual fee, and charge for certain types of transactions, such as cash withdrawals, making a balance transfer or using your credit card overseas

You could also be charged a fee if you go over your credit limit, or make a late payment. This could harm your chances of getting credit in the future.

Explore: How to avoid credit card charges

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 having the credit card, such as an annual fee. 

When comparing credit cards, the representative APR can give you an idea of how much a credit card could potentially cost you. 

Explore: How does APR work?

Representative examples

Representative examples are what lenders use to show the potential costs when advertising a particular credit card. Lenders need to reasonably expect to offer the representative APR (or lower) to at least 51% of successful applicants. 

Representative examples will show the representative APR and whether it’s fixed or variable. They’ll also show the purchase rate and whether this is fixed or variable. 

It’s important to be aware that you may not receive the representative APR when applying for a credit card. The actual APR you’re offered will depend on the lender’s assessment of your personal circumstances. 

Explore: What does a representative example look like?

Credit card eligibility

You can apply for an HSBC credit card if you:

  • are over 18
  • are a resident of the UK
  • have an annual UK taxable income or pension, before tax, of £6,800 or more

Some credit cards may have additional eligibility requirements, for example HSBC’s Premier Credit Cards are only available to HSBC Premier customers.

Before applying for any credit card, check the terms and conditions, and the eligibility requirements. 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. The better your credit score is, the more likely you are to have your application accepted.