Credit Cards

Credit cards offer some handy perks like cashback and enhanced consumer protections on purchases – and of course the ability to pay off large purchases over time. However, they need to be used responsibly or they can cause more problems than they solve.

How credit cards work

When you use a debit card to make a purchase, money is taken directly from your bank account to pay for the transaction. With a credit card, the card issuer pays for the transaction, then sends you a statement each month.

The statement will list the transactions you made in the past month, along with any balance owed from previous months. It will provide the total owed up until the statement date, and a minimum payment amount. This minimum payment will cover any interest and fees accumulated that month, plus at least a small portion of the balance owed.

If you pay the statement balance in full and on time each month, you will not owe any interest on your purchases, regardless of the rate on the card.
If you repay less than the full statement balance, you will accrue interest.
Interest is calculated from the day you made each transaction, not from the day the statement is due. This interest is not charged to you if you pay in full, but if you make a partial payment, you will have interest from all of that month’s transactions added to your balance.
If you fail to make the minimum payment, this is considered a missed payment.

Missed payments will damage your credit rating, your card issuer may charge you fees, and in extreme situations may take legal measures to recover the debt you owe.

How to pay your credit card

Payments to credit cards can be made manually at any time, using the bank details provided. However we strongly recommend using a Direct Debit to pay automatically.

For a card intended for normal day-to-day spending, we would always recommend setting up a Direct Debit payment for the full amount. This ensures you will not build up a balance or pay any interest.

If you’re worried about not having enough in your account on the day without some manual rearranging, or are intending to pay back a large balance over a period of time, set it so at least the minimum payment is taken automatically. This means that even if you’re away, busy, ill, etc and accidentally forget to make a manual payment, at least the minimum payment has not been missed.

How statement periods work

Statements are sent monthly, covering the month period immediately prior. The due date is typically 25 days after the statement date, however this number can vary from card to card.

For example, you could receive a statement dated 9th of November, covering transactions from the 10th of October to the 9th of November, with payment due by the 5th of December.

Your balance will not necessarily reach £0 when your statement balance is paid, as you may have used the card since the statement was generated. This is normal, these transactions will be covered in the next statement period.

Fees and charges

It used to be common for credit cards to charge an annual fee regardless of usage. Most modern credit cards do not charge an annual fee, although there are some exceptions, particularly with rewards cards and cashback cards. Always check the “Summary Box” (key information about the card) before applying.

Most cards will charge you in these circumstances:

If you do not pay at least the minimum balance on a credit card by the due date, or exceed your credit limit, you will be charged a fee (typically £12).
Using your credit card to withdraw cash is called a ‘cash advance’ and you will be charged a fee (typically around 2-3% of the transaction) and start accruing interest immediately (often at a higher rate than the usual interest rate of the card). Never use your credit card to withdraw cash.
Some transactions are considered ‘cash equivalent’ and are treated the same way as cash advances. Examples can include transferring money from the credit card to a bank account, online trading such as buying stocks and shares, and gambling transactions.
Using your card to make purchases in other currencies will typically cost a 2-3% fee.

Not all cards charge every fee – e.g. ‘travel cards’ don’t charge to use foreign currencies, and ‘money transfer’ cards are specifically used to transfer money from your credit card to your bank account. Choose cards that suit your needs, and always read the Summary Box carefully for details of fees and charges.

Why credit cards can be trouble

Interest makes everything more expensive

Credit cards have interest rates ranging from 0%-40%. A typical “all-rounder” card will be in the range 15%-20%, but some “bad credit” cards may have very high interest rates.

These high interest rates make purchases more expensive than they appear. If you only pay off the minimum payment every month, even a modest purchase can take a decade or more to pay off, costing many times the original cost of the item in interest.

Credit cards can confuse your mental budget

It’s easy to accidentally ‘double spend’ using a credit card. This means treating the same £100 in your budget as though it can be spent twice – once on your debit card and once again on your credit card.

We strongly recommend you think of your credit card as no different to your debit card, and only spend within your means. This is based on the income and savings you currently have, not future income.

If you’re determined to buy something on credit and pay it off over time, rather than saving up for it and buying when you have the money available, take the time to make a plan. For example, perhaps you want to buy a £1000 laptop but don’t have any savings. You get a 0% card, so you’re not worried about interest. You decide you will pay £100 per month for 10 months. Where will this £100/month come from? If you weren’t saving £100/month before, what makes you think you can afford a new £100/month bill?

Debts can quickly mount up

As credit cards allow you to spend more money than you actually have, sometimes much more, it can be easy to spend beyond your means.

We regularly see posts from people whose monthly budget is squeezed dry by credit card payments. It’s entirely possible to end up in a situation where even the minimum payments are unaffordable alongside essential bills and expenses.

While card companies have some legal obligations not to lend irresponsibly, it’s also your own responsibility to manage your finances and ensure you don’t borrow more than you can afford to repay.

If you’re struggling with credit card debt, see our debt page.

Advantages of credit cards

The warnings above shouldn’t put you off – used responsibly, credit cards can be useful tools.

Section 75 Protection

Section 75 of the Consumer Credit Act 1974 sets out that the credit card company is jointly and severally liable for a breach of contract or misrepresentation by the retailer. Therefore, if you have problems settling a dispute with a trader, you can contact your credit card provider to make a claim and recover any losses. This is particularly useful if the retailer has gone bust.

To qualify for protection under this act, all you need to do is make a purchase for goods or services that cost over £100 and no more than £30,000 (note this is the price of the item – 2x £60 items would not qualify) and pay at least part of that by a credit card from a separate provider than is the supplier of goods. The credit card needs to be in your name.

Fraud protection

Your credit card is relatively ring-fenced from the rest of your finances. If your credit card details are compromised and used to make fraudulent transactions, your credit card issuer can simply wipe the transactions from your account, and you are not out any money.

Free (or cheap) short term credit

After a purchase, repayment may not be due for as long as 56 days afterwards. This can be helpful if you have irregular income, you need time to move money out of savings, or have an unexpected emergency.

Credit ratings

Having and using a credit card can improve your credit rating by demonstrating your credit worthiness. See our Credit Ratings page for more detail.

Paying for hotels and car hire (especially abroad)

Some transaction types, like booking a hotel or hiring a car, can require large “holds” or “pre-authorisations”. A hold on a credit card is usually less disruptive than on a debit card, as you are unlikely to want to borrow up to the limit. In some countries a debit card will not be accepted for these transactions and a credit card is required.

Stoozing

Stoozing is the name for holding debt on a 0% credit card while holding an equivalent balance in a savings account earning a higher interest rate. By pairing these two financial products, you earn ‘free money’ off the difference in interest rates (around 0-5%). But this requires solid financial discipline to make sure you don’t spend more than you would have on debit, and that your savings keep up with your spending.

Applying for a credit card

Always use an eligibility checker, such as:

Types of cards

Cashback / Rewards: Some credit card providers offer a small amount of your purchases back either as cash or points. This typically works out to up to 0.5% for most cards, and up to 1% for American Express.
Interest-Free Purchases: 0% interest on your transactions for the first 12-24 months. Can be used for a big purchase you will pay off within that time, or for stoozing. After the 0% promotional period, interest rates will rise sharply.
0% Balance Transfer: For paying off old cards that are at a high interest rate and replacing with a 0% card. This will normally cost a fee. Note the 0% interest rate applies to your balance transfer only.
0% Money Transfer: For transferring money from a credit card to your bank account, such as for making larger purchases that cannot be made on a credit card.
Travel cards: Cards with good exchange rates and no fees for transactions in foreign currencies.
Credit Builder cards: Cards which accept applicants with poor credit history. They will come with high interest rates and fees, and should only ever be used for normal day to day spending and paid off in full every month by direct debit.

Helpful resources

MoneySavingExpert: Credit Cards
Head for Points – website dedicated to optimising rewards credit cards
money.co.uk credit card calculator – calculate the total cost of a credit card
moneyhelper credit card calculator – allows you to add multiple cards