The ultimate credit card guide

A credit card can be the most useful bit of plastic in your wallet if it’s used right and used responsibly.

It can help you build up your credit score, save you money and offer you financial protection all at the same time.

Of course it’s also easy for credit card use to spiral into problem debt, especially if you hold the misconception that your line of credit is just “free money”.

That’s why it’s important to understand what a credit card is and isn’t – because it can help you make the most of having one.

With that in mind, here’s your ultimate credit card guide, whether you’re thinking about getting your first one or just want to learn more about them.

What is a credit card and how does it work?

A credit card is essentially a payment card that allows you to borrow money up to a pre-approved limit to pay for goods and services.

When you use your debit card, the money leaves your bank account straight away.

But when you’re using a credit card, the card provider is actually paying for the transaction on your behalf.

Then once a month, it will tally up all those transactions and ask you to repay what you owe.

It’s a bit more nuanced than that of course.

You have to be eligible

You have to apply for a credit card and you will only be approved if you meet the card provider’s eligibility and affordability criteria.

Because credit cards are a form of borrowing, the criteria are much stricter than for opening a bank account.

Most providers will require a minimum income threshold, for example, and many will not issue cards to those who have never had a credit card or who have faced problem debt in the past.

There’s a credit limit

If your application is approved, the card provider will tell you your credit limit.

This is the amount of money that they’re willing to lend to you.

In general, the better your credit history, and the more money you earn, the higher your credit limit will be.

Over time, you can also request increases to your credit limit.

You can borrow up to the credit limit without penalties, but anything over it may incur a fee or the transaction may be rejected.

Don’t forget the interest

Like other forms of borrowing, interest applies to the money you owe.

But unlike other forms of borrowing, credit cards come with an interest free period, typically up to 56 days.

If you pay off your balance in full within that interest free period then you won’t have to pay any interest at all.

However, if you only pay off some of your balance or none at all then the card provider will start applying interest to your debt after the interest free period.

This interest will depend on your circumstances, and will be presented to you as an APR (annual percentage rate).

The better your financial standing, the lower your APR will be.

Different types of credit cards

Don’t just go for the first credit card you’re offered. Instead, you should shop around to see what might fit best with your lifestyle.

My personal favourite is a cashback credit card with travel benefits, like fee-free transactions abroad, since I’m always on the road for work.

Here are some of the other ones you could go for:

Standard purchase cards

Standard purchase cards are what you might describe as the “normal” option.

That is, they don’t have any specific features that make them distinctive from other types of credit cards.

Balance transfer cards

Balance transfer cards are designed to allow you to shift high interest debt on other cards to a single low interest one.

This extra breathing space can help you pay off the outstanding balance in a more manageable way.

There’s usually a fee to pay as part of the transfer, but for that you get a period of 0% or very low interest rate.

0% purchase Cards

As their name suggests, the 0% purchase cards offer 0% interest on your balance during an introductory period.

You still have to pay off a portion of your balance each month, but you can keep the rest of the balance outstanding without incurring any additional interest.

Not all 0% interest cards will allow you to balance transfer, however, which is why the balance transfer card is considered a different product.

Cashback and reward credit cards

Cashback and reward credit cards are pretty self explanatory: they reward your spending with a cash rebate, points or other perks for everything you buy.

Some standard purchase cards will offer cashback or rewards at specific retailers but since the benefits aren’t universal, they can’t always be considered the same thing.

Credit builder cards

For those who have poor or limited credit histories or are new to credit cards, credit builder cards can be a good stepping stone.

The credit limits are lower but they allow you to build up your credit history.

It can be particularly helpful if you’re getting your finances back on track before applying for a mortgage.

Student credit cards

Student credit cards are similar to credit builder cards.

They typically have lower credit limits and will help you build your credit score if used responsibly.

However, they’re designed specifically for students in full time education and sometimes come with additional perks not available on other credit cards.

Three features for card comparison

When you’re comparing different credit cards, there are three features you should consider.

The APR

The first is the APR.

Since this is the interest rate that applies to your outstanding debt, a card with a lower APR is best if you don’t intend on paying off your balance in full each month.

If you do intend on paying off your balance in full then the APR can be ignored.

The fees

The second thing to look out for is the fees attached to the card.

Some cards have annual fees, which can outweigh the benefits you get from the card.

Others charge for certain types of transactions, such as purchases made abroad.

Since different providers will charge different fees – or none at all – it can make one card much cheaper to use than another.

The credit limit

Since every credit card provider has their own rules around eligibility and affordability, the credit limit offered to you by different providers will be different too.

You might not ever need it but having a higher credit limit is almost always better.

If you consistently spend well below your credit limit, and repay your balance in full, you will be seen as very reliable by future lenders.

I’ve written a guide to picking the best credit card for you that might be helpful here.

The benefits of using a credit card

Regardless of which type of credit card you get, there are three benefits that are universal across all of them.

Building your credit score

You can build your credit score just by using your credit card.

Of course, the assumption here is that you’re using your credit card responsibly by paying off your balance each month and not spending beyond your credit limit.

This is because credit card providers will share how you use your card with the three main credit reference agencies.

If you’re responsible, this will be reflected in your credit score. And if you’re irresponsible, and miss payments or go above your credit limit, this will also affect your credit score.

It’s worth noting that you can absolutely build up your credit score without any form of borrowing so you shouldn’t feel you need to get a credit card just to get on the property ladder.

Saving you money

As I mentioned earlier, all credit cards come with an interest free period.

So unlike paying with your debit card, where the money leaves your account straight away, using a credit card means your money stays in your bank account and earns interest until it’s time to repay your balance.

Depending on how much money you spend, all those pennies can add up.

That’s before you even factor in the cashback you might get with certain credit cards.

Offering you financial protection

The best thing about credit cards is that they come with Section 75 protection.

This section of the Consumer Credit Act makes the credit card provider jointly liable, giving you an opportunity to recoup your losses if things go wrong.

Section 75 only kicks in when certain conditions are met so make sure you understand all of the rules.

The downside of credit cards

Credit cards are not for everyone.

Because you don’t see the money leaving your bank at the point of purchase, and you don’t have to repay the money straight away, it can feel like your line of credit is free money.

If you have self control issues, that spending can easily spiral out of control.

A good starting point is to learn to manage your spending.

Following some kind of budgeting or money management rule, such as the 50/30/20 rule, can also help.