Your guide to credit cards

• What do credit card providers look for in an application?
• How do you find the right credit card?
• How do you pay off a credit card balance?
• Can a credit card be used to withdraw cash?
• What protection comes with a credit card?
• What about credit card pre-authorisations and deposits?

In recent years, we’ve seen an explosion in the types of cards on offer, from balance transfer cards to rewards and cashback credit cards. The growing popularity of online shopping and credit card protection has been part of this increase. Today, credit cards are still one of the most common ways to borrow money, whether to splurge on a holiday or a new TV. Or as an alternative to a short term loan and to tide you over when the boiler breaks and you’re forced to cough up for an emergency plumber before payday

Another reason for this popularity is their relative flexibility. Although card providers will give the user a credit limit (a maximum amount to spend on the card), unlike personal loans, you don’t have to take (or be charged for) the full whack. Instead, you only use what you need. What’s more, if you can’t afford to pay it all back at the end of the month, a minimum repayment will allow you to spread the cost over a longer period, although a drawback to this is that you’ll probably have to pay interest on the debt in the meantime.

Another reason credit cards are still king is their ease of use. They’re widely accepted both at home and abroad. And, as you’re not carrying a wad of cash around, they’re often a safer way to carry money too. If you fall victim to a pickpocket or lost your card, you can cancel it immediately. Even if you’re not quick enough to notice it is missing and you become a victim of credit card fraud, there’s still a chance you’ll be able to recoup some or all of the funds back. 

Of course, there are serious risks associated with credit card use, as there are for most forms of borrowing. So if you are tempted to take one out, here are a few points and topics to consider.

What do credit card providers look for in an application?

You need to be at least 18 to apply (some providers say 21) and, equally importantly, be confident you can make at least the minimum repayment each month (read on to discover some of the charges and other dangers of defaulting). 

Some providers may specify that your salary is above a certain amount or disqualify you if you don’t currently have a job. Other obstacles to getting a card could be poor financial history, including having been declared bankrupt in the past or simply a bad credit score. The latter is crucial in determining not just whether you’re successful in your credit card application but how much interest you’ll be charged and the credit limit you’ll be offered. It’s worth knowing what's a good credit score and what's bad, and getting your score into shape if needed and before applying You can find some great tips for doing so in our guide on how to improve your credit score in 10 simple steps.

Remember, each time you formally apply for a credit card, a footprint will be left on your credit reference file - often referred to as hard credit checks and soft credit checks. Evidence that you’ve applied for lots of cards could negatively impact your credit score, so if you’re refused a card, don’t just move straight onto another provider. First find out why, see what you can do to improve your chances in future, and use comparison websites like MustCompare to narrow down the cards you’re more likely to be accepted for. 

How do you find the right credit card?

You should also be clear on the type of credit card you’re applying for. These days there is a huge range to choose from, and picking the best will depend entirely on your regular spending habits or reason for wanting the loan in the first place. Here is a brief overview of the types of credit cards available:

Credit cards for general, everyday use
With general, everyday use credit cards, you make purchases on credit and then pay back what you owe, either in whole or monthly. Normally, there is a grace period where you are not charged interest on balances, after which you are charged interest.

Zero balance transfer credit card
Also called zero interest balance transfer credit cards, these credit cards allow you to transfer your current card balance to another credit card that charges a lower interest rate or 0% interest rate. Normally a fee applies and is based on the amount you are transferring. The zero interest rate will apply for a limited time only.

In theory, you’ll be able to pay off your balance quicker and more cheaply because you won’t be paying additional interest on top, although any new purchases you make on the card may not be exempt in the same way. You can compare zero balance transfer credit cards free on MustCompare.

Zero purchase credit card
With zero purchases credit cards, you buy things without attracting interest for a limited time (usually between 3 and 28 months). After that, interest is charged on the debt left on the card and all future purchases.

Zero purchases credit cards allow you to spread the cost, interest-free, over a set period, but you’ll still have to meet the minimum repayment each month. When used correctly, these cards could be cheaper than getting a loan, although this does depend on the lender, so it’s always best to compare loans.

Rewards and cashback credit cards
These cards reward you by giving a percentage of each purchase back to you (called cashback) or other perks such as air miles or shopping vouchers. However, bear in mind that these benefits will need to  be paid for any associated monthly or annual card fees to make the choice worthwhile. Also, look out for cards that offer a high cashback rate (say, 5%) for a limited period only.

Of course, there exist many more examples of credit cards tailored to suit your needs and circumstances, including overseas spending cards if you travel a lot, which offer no or low fees for use aboard. With so many different options, it’s worth using a trusted comparison website to find the best deal for you. 

How do you pay off a credit card balance?

You’ve got your card, you’ve bought what you need, and now it’s time to pay the debt back. Make sure you make at least the minimum repayment each month, but it’s always best to pay the full balance where possible. That’s because failing to clear it at the end of each month will usually attract high-interest rates on whatever’s left.

If you continue to use your card, the interest will keep piling up, and some people could find themselves in a debt spiral that’s hard to extricate themselves from. Even if you don’t spend any more on your card, the debt will take longer to pay off and end up costing you much more than you borrowed in the first place.

Not all customers will face high interest on their remaining balance – plenty of providers offer 0% on purchases or balance transfers – or sometimes both – for new customers (but not on cash withdrawals – see below). This won’t last forever, though, so try to repay the debt in full before this period ends. 

Meanwhile, missing payments altogether could not only incur charges, but you might also lose those favourable introductory rates we were just talking about. It could also affect your credit rating. If you’re forgetful or don’t have the time to manually make the payments at the end of each month, it might be worth setting up a Direct Debit, which will transfer the money owed out of your bank account automatically. 

If you are struggling financially, it is always best to talk to your credit provider or lender as soon as possible. Additionally, plenty of organisations can offer tailored support for people with financial difficulties.

Can a credit card be used to withdraw cash?

Yes, but it’s best not to withdraw money using a credit card - considered a credit card cash advance. Unlike debit cards (which are mostly free to use at cash points, or at least warn the cardholder if there’s a charge), cash advances on credit cards are likely to cost you every time you pop one in the machine, sometimes without telling you first. On top of this fee (as much as £5 per withdrawal), you’ll also be hit with higher interest charges, even if you pay it off at the end of the month. 

And it’s not just at cash points that you might be stung. Any transaction that’s effectively a cash deal or cash advance falls under this umbrella. Using your credit card to buy foreign currency is an obvious example. Also paying your electricity bill can be considered a cash advance.

Other places to avoid credit cards are while travelling abroad. While not true of all types (some are designed especially for foreign holidaymakers or frequent travellers), a general rule of thumb is to keep them in your wallet unless you’re willing to pay foreign transaction fees to convert the local currency into sterling. 

What protection comes with a credit card?

In the UK, purchases over £100 and up to £30,000 made with a credit card are protected and covered by Section 75 of the Credit Act 1974. For example, the company you booked your holiday with goes bust, or an item you’ve bought online doesn’t show up, or you find out your purchase is faulty when you get it home, you should be able to claim the full cost back if the merchant refuses to help, even if you only paid the initial deposit on credit card. 

If the item itself was under £100, you’re not covered. Don’t despair entirely, however, because a voluntary scheme called ‘chargeback’ might be able to settle the claim instead. The process (which applies to debit cards and prepaid cards too) depends on card companies being able to claw back your money from the firm at fault by reversing the transaction. While there’s usually no minimum spend here, the time you’ve got from making the purchase to putting in a claim is usually limited, so contact your card provider as quickly as possible. 

When claiming back money for a credit card purchase, your first port of call should always be the company you bought it from. Only when it’s obvious you’re getting nowhere (either they’re not responding, or have gone into liquidation, or point-blank refuse a refund), you should write to your credit card company stating:

1. the purchase facts (plus receipts, if you have any);
2. the complaints process you’ve followed to far; and
3. a brief explanation of what you want them to do for you, always referencing “Section 75 of the Consumer Credit Act”.

What about credit card pre-authorisations and deposits?

If you’re hiring a car or booking a weekend away at a hotel, it’s common for credit cards to be used as security, either against the reservation itself or possible future spending. Avis, for example, currently insists on putting a pre-authorisation amount of £300 on their customers’ cards to cover additional days or fuel. That’s on top of the estimated cost of your rental (minus anything you’ve paid in advance).

While this isn’t a ‘charge’ per se, it acts as a temporary hold on part of your credit limit. Upon returning your vehicle (or checking out of your hotel room), the pre-authorisation funds will be released again by the card issuer, but this may take up to 14 days. In the meantime, you won’t be able to spend the money. 

Concluding

Before applying for a credit card, be sure to understand the requirements and the risks. Only making minimum payments every month will mean you are charged interest on the balance. That, coupled with frequent usage, may cause your credit card debt to spiral out of control.

Also, be clear on the type of credit card you’re applying for. Some offer additional benefits, such as air mile points and interest-free periods. So it’s worth shopping around to compare credit cards and options. Avoid credit card cash advances, such as ATM withdrawals, as you will be charged a fee for this service, and you’ll start paying interest immediately on the amount you withdraw, normally at a higher interest rate.

Enjoyed this guide? Sign up for our monthly newsletter today and get the latest tips and guides.