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What is a credit card?

what is a credit card

A credit card can be a convenient way to pay for almost anything, from a new pair of shoes to a holiday in the sun. But it’s important to remember that a credit card is a type of loan. When you spend on a credit card you are essentially borrowing money – and if your debts get out of hand you could end up in big trouble.

How credit cards work

When you apply for a credit card, you apply to borrow money from the card issuer, usually a bank. The issuer will look at your credit history before it accepts your application – and if you have a low credit score you could be refused credit.

If all is well, the bank will set a credit limit, which is the maximum amount you can spend on the card. The card company will send you a statement every month, detailing the transactions on the card, plus the amount owing. It should also give the minimum payment and the payment due date.

Borrow money for nothing

Some credit cards charge zero interest for a limited period, but the standard rate is about 16%. However, if you play your cards right, you need never pay a penny in interest. Most credit cards come with an interest-free period of about 56 days. In other words, as long as you clear the balance in full when you receive your monthly statement, there is no interest to pay.

Pay more than the minimum

If you cannot afford to clear the outstanding balance you will start to accrue interest – and the debt could quickly spiral out of control. You must pay at least the minimum each month, but try to pay as much as you can afford. If you make only the minimum monthly payment, it could take many years to clear the debt.

Beware penalty charges

Anyone who misses a payment or misses the payment deadline

will normally have to pay a penalty charge. There is also a penalty if you exceed your credit limit. So it’s important to be in control of your credit card and monitor your statements. And if you are running into problems, contact the card issuer immediately.

Don’t withdraw cash

You can use your credit card to withdraw cash from an ATM, but it’s best to resist the temptation. There is usually a fee for cash withdrawals and the rate of interest is typically higher than the standard rate on the card. Plus, there is usually no interest-free period, so the cash withdrawal will start to rack up interest immediately.

Card protection

Some people prefer credit cards to cash as they can be more secure. If your card is lost or stolen, you can simply report the incident to the bank and cancel the card. Most cards also offer protection for any purchase over £100 and below £30,000.

Credit cards can be an easy and convenient way to pay for a whole range of goods and services.

For example, if you book a £2,000 holiday and the travel firm goes out of business, the card company should cover the cost.

Shop around

You don’t have to approach your own bank for a credit card; you can apply to any issuer on the market. But the very best deals are usually reserved for customers with a perfect credit record. It’s also worth bearing in mind that you might not be offered the advertised rate. The rules state that only 51% of successful applicants must pay the advertised rate, which means that almost half could be paying a much higher rate of interest.

Credit cards can be an easy and convenient way to pay for a whole range of goods and services. They can also be a cheap way to borrow, if they are used correctly.

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Category: Credit

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