How Do Credit Cards Work in the UK? Learn More Here

Credit cards are one of the most popular ways to borrow money in the UK. As of January 2022, there were almost 60 million credit cards issued to UK residents. Lots of people have more than one card in their wallet or purse. But do you know how credit cards work?

Simply put, a credit card is a physical card that you use to pay for things. The money comes from the credit card provider who you have to pay back.

But if you live in the UK and you want a better understanding of how credit cards work, read on. We’ve got the answers to your questions, and we’ll give you tips on how to use them safely and responsibly.

What is a Credit Card?

In simple terms, a credit card is a payment card that you can use to buy almost anything. When you take out a credit card, you’re given a credit limit. You can spend up to your credit limit but then you have to pay the money back. If you pay back everything you’ve spent, the money is there for you to spend again. This is known as revolving credit.

If you don’t pay back the money you spend when payment it’s due, the balance you owe will remain on the account. This outstanding balance will have interest added to it until it’s paid off.

You can pay back as much you want each month. But you’ll be expected to repay a minimum amount each month. The more you pay back, the less interest you’ll pay.

What is the Difference Between a Debit Card and a Credit Card?

Although both cards are payment cards, there are differences between them. The table below lists the main ones.

What Different Types of Credit Cards are Available in UK?

There are many different types of credit cards available in the UK, each have their own features and benefits. Let’s take a look at some of the most popular types of credit cards.

1. Balance Transfer Credit Cards

Balance transfer credit cards let you transfer over an outstanding balance from another credit card. The incentive for doing this is that they should offer a 0% introductory APR on the balance you transfer. This would be set for a limited period.

This is a great solution if you’re trying to pay off debt without accruing any interest on your balance. The new credit card provider will charge a fee for transferring the debt over, which they add to your balance.

If you’re going to transfer your balance to a 0% credit card, make sure you work out what the fee is. You don’t want to pay more in transfer fees than what you’d pay in interest if you left the debt where it was.

2. Rewards Credit Cards

Rewards credit cards are a type of credit card that give you something back every time you spend. The rewards can be:

• Points that you get to spend on something else. Supermarket credit cards are typical for this type of reward.
• Cash back. This is where a small percentage of the money you spend is credited back to you.
• Travel miles. These are points that can be exchanged for flights or holidays.

These cards can be a great way to earn rewards on everyday purchases. But it’s important to remember that they may come with higher interest rates and fees. Rewards credit cards may also have annual fees ranging from £0-£100 or more. As long as you know the terms of use, rewards credit cards can be a great way to earn rewards on your everyday spending.

3. Credit Cards for Bad Credit

If you have bad credit, it can be difficult to qualify for a traditional credit card. But there are credit cards available for people with bad credit in the UK. Their purpose is to help you rebuild your credit score.

These cards tend to have higher interest rates and lower credit limits than regular cards. But they can be a valuable tool for rebuilding your credit history.

If you’re not sure if you’re eligible for one, there are many eligibility checker sites where you can take a look. These sites can help you find out your best chances of getting a credit card.

4. Travel Credit Cards

Travel credit cards are a great option for those who frequently travel abroad. These cards let you spend money abroad without charging you a fee on each transaction. That’s so long as you don’t use them to draw out cash.

You may find some that offer other perks, such as:

• travel insurance
• priority boarding
• complimentary lounge access.

Remember that they may come with an annual fee so check the terms before you apply.

5. Credit Builder Cards

The credit builder card is a great choice for people with no credit history or with a poor credit rating. This type of card allows you to build up your credit history by making regular payments.

They’re a good way of improving your credit score but watch out for the interest rates. They tend to be higher than regular credit cards.

6. Interest Free Purchase Credit Cards

This type of credit card offers 0% interest on purchases for a limited period. This is helpful for consumers who need to make a large purchase but don’t want to pay any interest. You just have to make sure you pay it all back within the interest free period.

Which credit card is best for me?

The best credit card for you will depend on your spending habits and needs. To find out which one’s best for you, ask yourself these questions.

• Do I need to pay off debts? If so, a balance transfer credit card is best.
• Do I need to make a large purchase? If so, an interest free purchase credit card will be your best option.
• Do I have a low credit score? If so, a credit builder card will help.
• Do I want rewards for my everyday spending? If so, a rewards credit card will do the trick.
• Do I travel a lot? If so, a travel credit card may be a good option for you.

Whatever card you choose, make sure you read all the terms, so you know what fees and charges are included.

What are the Pros and Cons of Credit Cards

There are good points and bad points to having a credit card. We’ve listed the main pros and cons in the table below.

What Information do I Need to Apply for a Credit Card?

If you want to apply for a credit card in the UK, you’re going to need to provide information about yourself. The information they’ll need is likely to include the following.

• Proof of your identity
• Proof of your address
• Details of your income and employment
• If you’re doing a balance transfer, details of the balance you want to transfer.

Getting the documents ready before you start the application will make the process more seamless.

How Can I Apply for a Credit Card?

Applying for a credit card in the UK is a relatively simple process. Most banks offer credit cards,

as well as other lenders.

Most of them have an online application process that make it straight forward to apply. Here are the steps you need to follow:

1. The first step is to make sure that you’re eligible for a credit card. This would include:
   • Being a resident of the UK
   • Having a good credit history
   • Having a regular income
2. If you meet these criteria, then you can start the application process by filling out an online form. Make sure you’ve got all the information and documents you need on hand.
3. Once you’ve submitted your application, you should receive a decision within a few days. Many lenders will give you a decision instantly.
4. If you’re approved for a credit card, it’ll be sent to you through the post. This can take up to 7-10 days.

What Things Should I Consider Before Applying for a Credit Card?

Below are a few key factors that you should consider before applying for a credit card.

1. Annual Percentage Rate (APR)

One of the most important things to look at when applying for a credit card is the APR. This is the amount of interest that will be charged on any outstanding balances on your credit card. The higher the rate, the more it’ll cost you.

The only way to avoid paying interest is by paying off your balance in full every month. If you can’t do this, then the APR will have a big impact on how much your credit card will cost you over time.

2. Fees of the Credit Card

Many cards have annual fees, late payment fees, and balance transfer fees. Make sure that you understand all the fees before you apply for the card. Otherwise, you could find that borrowing money on your credit card becomes expensive.

3. Can You Control Your Spending?

Credit cards can make spending easy. They could make it easier to make impulsive purchases. Use your card wisely, if you let your spending get out of control you could end up in a lot of debt.

A good way to control this is to leave your credit card at home when you go out. Use it just for the purpose you took the card out. For example, if you wanted it to transfer a balance and pay less interest, don’t use it for anything else. Each time you go to spend on it, remind yourself that the money’s not yours, you have to pay it back.

If you struggle to control your spending, think twice about taking out a credit card.

How Much Can I Spend Using a Credit Card?

The amount you can spend on your credit card is limited by the card provider. Depending on the card, your credit limit can be a few thousand pounds or more. But that doesn’t mean you should max out your card every month. In fact, doing so can damage your credit score and make it harder to get approved for new credit in the future.

If you can’t clear what you owe each month, aim to keep your balance below 30% of your credit limit. That way, you’ll avoid paying too much interest and are less likely to harm your credit score.

What Charges Will I Face Using My Credit Card?

Depending on how you use your credit card, you may face the following charges.

1. Most credit cards will charge a transaction fee for any purchases made in a foreign currency. If you buy foreign currency with your credit card, it’ll be charged as a cash withdrawal.
2. If your credit card doesn’t have an interest free period for purchases, you’ll be charged interest on purchases you make. The interest rate will be applied to any balance you carry over from month to month. The amount of interest will depend on the card provider. But it’s usually not cheap.
3. Most credit cards will charge you a fee for using it to withdraw cash. As you can pay for most things with a credit card, it’s better to avoid using it to draw out cash

Before you use your credit card abroad or in the UK, check what the charges are with your card provider.

FAQs about Credit Cards in the UK

Disclaimer: We are not providing financial advice. These are just tips for informational purposes. Also, we are not affiliated to any of the external parties linked here, they are provided for reference only.