How do credit cards work?

It is essential to understand the basics about credit cards, so that you can use your card correctly and responsibly.

To understand how credit cards work, it’s important to have in mind that you are borrowing money every time you use it: you will be given a limit on the amount of money you can spend on your credit card, and you will have a monthly repayment date.

If you make your credit card payments in full by the repayment date, you will not have to pay interest, except for cash withdrawals where daily interest is usually charged from the day of the withdrawal. You will be given a minimum monthly repayment amount. If you do not pay at least that minimum amount each month, you are likely to be charged a fee. If you choose to pay back smaller amounts over a longer period of time, you will also have to pay interest.   

Use this repayment calculator on the Money Advice Service website to help you understand how long it might take to repay any existing credit card debt and the amount of interest you may be charged over this period. 

Benefits of a credit card

There are a number of advantages to credit cards.

A credit card is a quick, convenient, flexible and secure way to borrow money to pay for things immediately.

Consumer protection is another benefit of having a credit card: in certain situations, you are protected for a purchase on a credit card between £100 and £30,000. So in the event that the company you buy a product or service from goes bust and you do not receive the product or service, or there is something wrong with your purchase, you may be able to claim the purchase price back from your credit card provider.

Sensible use of a credit card will boost your credit score: if you repay the balance on time in full each month and stay under credit limit, you may have access to more credit in the future. 

Different types of credit card

You should familiarise yourself with the variety of credit card types on the market before deciding which one will work best for you.

Credit cards give you a credit limit to make purchases and require you to pay at least a minimum amount back every month.

Credit cards can offer rewards and other offers as an incentive to use them more often, for example by giving you cashback or vouchers depending on how much you spend.

Balance transfer cards allow you to transfer debt from one credit card to another. Some offers allow you a certain amount of time to repay the balance you have transferred without having to pay interest.

The best time to apply for a credit card

When you apply for a credit card, the provider will want to make sure that you can afford to make your repayments. One of the ways they can assess this is by looking at your credit history.

If you have had difficulty making repayments in the past, this will have a negative impact on your credit score. Making repayments in full and on time will have a positive impact on your credit score.

You are most likely to be approved for a credit card when you have a healthy credit score: as an aqua customer you can benefit from the free aqua credit checker service which gives you access to your credit report allowing you to monitor your credit score.