How Credit Cards work (+5 Key tips)

What are Credit Cards?

Credit cards in principle work just like any other card. You can use them to buy thing online or offline, withdraw money etc

Credit cards are however very different from debit cards. They provide an ongoing line of credit with no fixed end date as long as you always repay the borrowed credit every month.

Credit card terms🎈

The credit card provider gives you a credit limit: the maximum amount you can borrow and an APR, the rate of interest you pay when you owe the credit provider by spending any of the credit available to you.

Your credit limit and your APR are given to you based on your credit score.

You credit provider will also give you a date(you can change) every month at which you have to pay them back any money you have spent. Usually they don’t ask for the full credit limit but 90% or so. This is known as the credit card minimum payment.

Credit Card charges🚩

The credit provider will charge interest on any amount you owe them beyond this minimum payment after your due date.

This is why it is always better to repay your credit card balance in full at the end of the month.

Credit Card balance🤑

Credit card providers also allow you to carry a balance from month to month.

They will continue charging you for any amount you owe beyond the minimum payment you are required to pay every month.

This includes any interest charges, fees etc you might have incurred in the past month. This is known as compounding. It is the process where interest is charged on any previous balance + the previous interest earned.

You can pay your credit card balance off at any time to avoid interest charges.

Most credit card providers will charge a fee for withdrawing cash or using your credit card in any way that requires cash upfront e.g gambling. This is known as a cash advance as you are essentially using cash upfront.

Types of Credit cards🙌🏻

There are different types of credit card. The cashback credit cards which give you cashback when you purchase, student credit cards built specifically for students, reward credit cards which offer certain rewards and balance transfer credit cards which allow you to move your credit card balance to them & credit builder cards which help you increase your credit score by building credit.

If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.

You can also contact the debt charity “Step Change” if you are in debt and need help.