How a credit card works (2024)

Unlike a debit card, which uses the money in your account to pay for things, a credit card borrows money, which you’ll then need to pay back later. So it’s important to choose a credit card that’s right for your needs. You’ll usually be charged for borrowing in two ways:

Interest, which is worked out as a percentage of the money you’ve borrowed.
And other fees, which can be standard or charges for things like late payments.

Every person gets a credit limit for their card. This is the maximum amount a credit card will allow you to borrow at any given time and is based on your personal circ*mstances.

For example, say John has a new credit card with a credit limit of £1,000. He can use this to repair his car for £500 then pay this off over time. Every month, John will get a credit card statement that tells him his overall balance, how much his minimum payment is and the due date he needs to pay by.

If he pays off his entire statement balance before that month’s due date he won’t be charged interest at all. However, if he pays it back over a longer period he’ll pay interest – unless he happens to have an interest-free offer.

A credit card lets you change how much you pay back each month depending on your circ*mstances.
So if one month John’s budget is particularly tight he can choose to pay only the minimum payment. This is the minimum amount his credit card provider will let him pay towards his balance each month.

However, if John regularly pays more than his minimum payment, he will clear his balance faster and pay less interest on the money he borrowed. That’s why we recommend paying as much as you can every month.

So, if you use it responsibly, a credit card can be a helpful tool.

For example, you can furnish your new house whenever you move in, then pay for it over the course of the year. Or, if you have existing borrowing, but see a lower interest rate offer, you could reduce your outgoings by transferring your balance to a credit card with another provider.

For purchases over £100 and up to £30,000, credit cards offer protection under Section 75 of the Consumer Credit Act. So if there’s a problem with your purchase, your credit card provider could help you get your money back.