What is a credit card?
Credit cards are a way of borrowing money to pay for bills, goods, or services. The credit card provider sets a limit on how much you can spend on the card based on your financial circumstances. When you reach that limit, you cannot use the card until you have paid off some of the balance. The balance is the money you have spent on the card, in other words, it's your debt.
You can apply for a credit card online or in-branch at a bank, building society or even some supermarkets, such as Sainsbury’s and Tesco.
You're charged interest on any money you borrow on a credit card - it's calculated as an APR (Annual Percentage Rate). However, most cards do not charge you interest provided you pay back the full amount you spent on it each month.
Credit cards are a great way to build up your credit file, which in turn makes it easier for you to borrow larger sums (say, for a mortgage) later on. But remember, that ' credit' is still debt. If you have any doubt that you could not repay even the minimum amount of what you owe, a credit card may not be the best thing for you. Debt can quickly spiral.
How credit cards work
Not all credit cards are created equal, and different cards have different benefits. That said, the longer the interest-free period on spending, the better. That way, you'll only need to repay the exact amount you spent, rather than the interest on top. This can make credit cards the cheapest way to borrow money.
You pay off your card in arrears. For example, you pay off January's balance in February, February's balance in March and so on. You do not have to pay off the full amount you owe on your card, but you must make some form of repayment each month.
To avoid having to pay late fees, you need to repay the 'minimum amount' declared on your monthly statement. But only paying the minimum amount means you stay in debt for longer. The minimum amount is worked out as either a percentage of your balance plus interest, or a fixed amount.
You'll incur a fee if you pay late or miss a payment. Consistent late or missed payments not only cost you in fees, but they also have a really negative impact on your credit score, making it much harder for you to borrow money in the future. To stop this from happening, set up a direct debit from another account to make sure you at least pay the minimum amount.
Types of credit card
You can get a credit card for a wide range of uses, far beyond the basics of simply making purchases and paying for them later.
For example, you can use credit cards to help pay off other debts using balance transfer or money transfer credit cards. Or you can use them to collect rewards and cashback, spend money cheaply abroad or improve your credit score.
Visa, MasterCard or American Express
Visa, MasterCard and American Express are all payment providers, or networks, that link the bank (or other credit provider) and the retailer.
Visa and MasterCard do not actually provide the credit cards or the credit. American Express is slightly different because they also issue their own credit cards as well as acting as the payment provider.
Payment providers make their money by charging the merchant for the service of taking the credit card payment – and American Express generally charges merchants a higher rate than both Visa or MasterCard. This means Visa and MasterCard are accepted virtually everywhere, whereas American Express is less common.
Merchants might be more reluctant to accept American Express, because it costs them more to process the payment. But this is also how American Express is able to offer its credit card holders with higher value perks such as travel rewards and cashback.
Balance transfer credit cards
Balance transfer credit cards allow you to transfer debt from one credit card provider to another.
In order to draw in customers, balance transfer credit cards offer you a 0% interest rate for a set period of time, usually a minimum of three months to a year. But some of the leading deals give you 0% interest for two years or even more.
You'll have to pay a balance transfer fee, which is a percentage of the debt you are transferring. Generally speaking, the longer the offer period, the higher the fee will be, but it is generally 1% to 4%.
It can still work out much cheaper than keeping your debt on the same credit card. For example: if you have a debt of £1,000 on a card with 18% APR (Annual Percentage Rate), it would cost you £63.80 per month for 18 months to clear the balance. To transfer the debt to an 18 month 0% balance transfer card with a 3% balance transfer fee, it would cost you an initial £30, but your monthly payments would only be £55.50. That's a total saving of £119.40.
You could save potentially more depending on the deal you get, and the rate of interest you are currently paying.
Balance transfer credit cards work like this:
- When you apply for one, you are asked to provide details of the credit card you wish to transfer money from
- Your new balance transfer credit card will have essentially paid off your old credit card, but you'll now owe money to your new credit card provider
- You'll pay a percentage of the debt as a fee to your new balance transfer credit card provider upfront
- You can start paying off your balance at 0% for the length of the deal
- Once the deal ends, the interest rate will go back to a relatively high rate of interest, so make sure you have a plan to pay off the debt in full within the offer period
You can compare balance transfer credit cards with Uswitch.
0% purchase credit cards
With a 0% purchase credit card, you can make a purchase and pay off the debt over a longer period of time without paying any interest. Many of the leading deals give you 0% interest on purchases for up to a year, or even longer.
These credit cards are best for big purchases at the start of the deal. That way you can pay them off over the entire period in instalments.
For example: you could buy an annual travel season ticket for £2,000 with an 18 month 0% purchase credit card, the first month you get the card (provided you have at least a £2,000 limit), and pay it off in 12 monthly instalments of £167.68.Because annual season tickets are cheaper than monthly passes, you'd end up saving money each month.
Just make sure you pay off the debt within the 0% offer period, or you could get stung with high interest rates.
You can compare 0% purchase credit cards with Uswitch.
Cashback and reward credit cards
Some credit cards give you rewards or cashback on purchases. They usually have a higher interest rate than other cards, so only get one if you can afford to pay back the balance in full at the end of each month.
Cashback credit cards give you back a percentage of the money you've paid as cash into your account. You can later withdraw or use it to pay back your credit card balance. For example, if you have a credit card offering 0.5% cashback on all purchases, then if you make a purchase of £1,000 you will get £5 back.
You can get a whole range of other rewards with various credit cards. For example, airline rewards, where you collect points to spend on flights and travel with every purchase you make.
Some supermarkets and big-name brands have their own rewards credit cards that double up as customer loyalty cards. You can purchase anywhere and build up points for the card provider store.
Finding the right reward or cashback credit card for you depends on your lifestyle and spending habits. Think carefully about which rewards will serve you best and make sure you can always pay off the cards in full each month.
Take a look at our best cashback and reward credit cards.
Travel abroad credit cards
When travelling abroad, finding a convenient way to spend money can be tricky. With travel abroad credit cards you can make purchases without having to pay foreign transaction fees.
With a standard credit card, you would have to pay a small percentage of the purchase as a fee, known as a foreign transaction fee. The same applies to debit cards as well.
Travel abroad credit cards use the payment issuer's exchange rate (MasterCard or Visa exchange rate) to figure out the price, without adding any extra on top. MasterCard rates are often better than Visa.
Although exchange rates on travel credit cards are competitive and often advertised as 'perfect', they're not exactly the same as what the immediate currency market shows. Nonetheless, it often works out to be comparable in price to cash, but with the credit card bonus of protecting your purchases.
To ensure you get the best rates possible while you are abroad, ask to pay in the local currency rather than sterling.
You can use Uswitch to search for credit cards for travelling abroad.
Money transfer credit cards
Money transfer credit cards allow you to transfer cash into your current account. This means you can pay off any kind of debt. Money transfer cards are typically used to pay off expensive overdrafts.
Similar to a 0% balance transfer credit card, money transfer credit cards come with extra long 0% interest offer periods. So, you can repay the balance without paying interest over a year or two...or sometimes longer depending on the card you get approved for.
You'll be charged a fee of around 4% of the amount you wish to transfer from your credit card to your account, though this varies depending on the credit card provider. For example, if you wanted to use your card to transfer £2,000 into your account, it would typically cost you £80. This amount could be far lower than paying off a £2,000 debt on a loan or overdraft, which will likely charge you interest.
Compare money transfer credit cards currently available.
Credit building and bad credit credit cards
If you have a poor credit score or little credit history, you might still be able to get a credit building or bad credit credit card. These credit cards are aimed at those with a less than perfect credit history and can help customers improve their credit score.
Each time you make a debt repayment it shows up on your credit report, contributing to a positive score. Credit building credit cards encourage you to make debt repayments in full and on time because they have low credit limits and high interest rates.
Check out Uswitch's selection of credit cards for those with poor or limited credit.
Dual, best-of-both or combo cards
Many leading balance transfer credit cards also offer 0% deals on purchases as dual or combo credit cards. You can use the same credit card to make purchases at 0%, even while you pay off the balance you have transferred from another credit card, also at 0%.
Two different offers on one card may sound great, but if you need a balance transfer card to reduce existing debts, it's not advisable to go ahead and spend more on it - even if it is at 0% interest. You would only make clearing your overall debt harder.
Comparing the best credit cards
Credit card comparison tools, like the one above, can help you identify the best credit cards in the UK. But you may not be eligible for all of them. It's down to your personal circumstances and the type of card you actually need. There's a lot to choose from, which is why it's a good idea to use our eligibility checker to see which ones you're likely to be accepted for.
Comparing credit cards can help you work out what your priorities are. If you have a good credit score and always pay your bills on time, then you can earn extra on your spending with a cashback or rewards card. On the other hand, you may have a poor credit score, or little borrowing history, in which case a bad credit or credit-building credit card would be more suitable. For those with existing credit card debt, a 0% balance transfer card could help you pay off your debt sooner.
Can I get a credit card?
You must be at least 18 years old to get a credit card. You could get one even if you are a student. Whether or not you can get one ultimately depends on your financial situation. Credit card providers must check your credit file before issuing you with a card.
If you've never borrowed money before, there is little evidence to prove that you can make repayments. Credit card providers may still give you a card, but perhaps with a low spending limit, or a short interest-free period.
It's highly unlikely you'll be able to get a credit card if you have been declared bankrupt, have an IVA (Individual Voluntary Arrangement), or have any CCJs (County Court Judgements) against you. But there are cards specifically designed for those with a bad credit history.
How to apply for a credit card
From the moment you receive your credit card in the mail, you should be able to start using it right away. In some cases you may need to first call up the provider or register online to activate the card and set up a PIN.
However, how long the credit card takes to come to your home could be a week or two from the moment you've received notification that you've been approved.
The process for a credit card application typically looks like this:
- Apply online for a credit card (approximately 5 minutes)
- Await response to see if your application has been approved or rejected (could be as quick as one minute or as long as two weeks)
- If you've been approved, wait for your credit card to arrive in the post (usually takes 5-10 business days)
- You may need to register the card online or call up the provider to activate before you can use it (a couple of minutes)
Credit card applications
The application for a credit card is a necessary part of the process and helps the provider assess whether or not you should be approved or rejected for their credit card.
Most applications are fairly simple, and will ask you for your name, address and contact information. They will also ask a few financial questions, such as your income, your occupation, and how long you have lived at your current address.
Some providers may ask additional questions depending on what their service is providing, for example if you would like to take out a cash advance, or if you are planning to transfer a balance over immediately.
What do I need to do?
Credit cards are usually some of the easiest financial applications you can make, in terms of the information you will need to provide.
The questions you should expect to find on a credit card application usually include the following:
- Your name
- Contact information
- Date of birth
- Address and how long you have lived there
- Residential status (tenant, owner, living with parents, etc)
- Your annual income
You should make sure your information is correct when applying, but the questions can usually be answered by most people fairly comfortably.
On a balance transfer or money transfer credit card application, you will need to have the details of the other accounts you are transferring to your new credit card.
However, there are potentially other areas you will need to take care of before you even apply for a credit card to reduce your chances of being rejected.
What does it mean if a card is listed as an 'advertisement' or 'promotion'?
We sometimes receive payment from card providers to display their cards in prominent locations.
These are adverts and are designed to be distinct and separate from the other cards on our comparison tables. We hope this makes it clear which cards are top-of-table deals and which cards are paid-for promotions.