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How Do Credit Cards Work? A Complete Guide

By:  Sean LaPointe | 20th December 2021

If you are interested in getting a credit card – but first want to know the ins and outs of what one is and how it works – then you have come to the right place. If used correctly, a credit card can be a useful financial tool that allows you to borrow money, reduce debt or earn rewards. But in order to do any of those things, you may first need to know what a credit card is, what types of credit cards are out there and how they work. Let us break it down for you.

What is a credit card?

Simply put, a credit card is a type of loan. Provided by a bank, building society or other type of credit lender, it is a card that provides you with a credit account. This credit account then allows you to borrow money from your provider.

All credit cards will carry some form of interest rate. This is the rate of interest that will be charged on any balances that remain unpaid on the card. Similarly, all credit cards will have a credit limit. This is the maximum amount you will be allowed to borrow on the card.

How do credit cards work in the UK?

You can use a credit card to make purchases, spending up to your specified credit limit if you so wish. Once the card is active, it will then have a balance on it which will be shown in your monthly credit card statement. Each card has a minimum monthly payment, which will need to be paid in order to avoid late payment fees. Any balance that remains unpaid on the card will be subject to interest charges.

Interest rates

One of the most important things to note is that every credit card carries an interest rate. This is what you will be charged on your borrowing, but there are different interest rates attached to different functions on the card:

Purchase rate – This is the interest you will be charged on purchases you have made using your card if you do not pay them off fully in your monthly statement.

Balance transfer rate – If the card offers balance transfers (not all do), then this is the rate of interest attached to any balances you have transferred over to your card.

Money transfer rate – As with balance transfers, not all cards offer a money transfer feature. If they do, the money transfer will carry a separate interest rate which may differ from the purchase rate.

Cash withdrawal rate – This is the rate of interest that you will be charged for any cash withdrawals made with your card. It is very important to note that with cash withdrawals interest is charged from day one, so it is advisable to avoid using this function if possible.

You will be able to find details of these rates in your credit card’s summary box online. However, when comparing credit cards, what you are more likely to see is a card’s APR or annual percentage rate. This is the interest rate on the card, as well as any other charges such as an annual fee. The inclusion of other annual charges is why the APR on some cards may appear higher than the purchase rate. It is a good way to compare the cost of different cards as this represents the annual cost of borrowing.


Something else you can expect from any credit card is that it will carry some fees. If you use your card wisely, the likelihood is that you won’t encounter any of these – but it is a good idea to know what they are, just in case.

Late payment fee – This fee is charged if you miss a monthly payment.

Overlimit fee – This fee is applied if you exceed your credit limit.

Cash transaction fee – This is a fee applied to any cash withdrawals you make using your credit card. This is on top of any interest charges.

Non-sterling transaction fee – This is a fee for any transactions you make abroad or in a different currency.

Some cards have other fees attached, such as balance transfer fees or money transfer fees, but that depends on what type of card you have. Similarly, some cards, typically reward cards, could have an annual fee.

Types of credit cards

As you may have already gathered, there are many different types of credit card. What type of card you may want will depend on your own financial needs. Credit cards aren’t a one-size-fits-all type of financial product, but the advantage is that there is lots of choice.

So, let’s take a look at what types of credit card are available:

0% purchases

A 0% purchases credit card offers you an interest-free period on your purchases. With this type of card, you can make a large purchase and pay it off over a period of time without incurring any interest charges.

0% balance transfers

A 0% balance transfer card lets you transfer existing debt to your new credit card, typically interest free. You then have a set period of time in which to pay off the balance before incurring interest charges. Balance transfer cards typically carry a fee, which is taken as a percentage of the amount of debt you have transferred.

0% money transfers

A 0% money transfer card is similar to a balance transfer card. It enables you to transfer money from your credit card to your current account, essentially providing yourself with an interest-free loan. Once again, transfers usually have fees attached.

Reward cards

Reward credit cards are cards that reward you for spending on your card. Rewards can vary but usually come in the form of points, vouchers or air miles.

Cashback cards

Cashback credit cards are a type of reward card, but instead of points, you receive cashback on your spending. Typically, you automatically earn a percentage of whatever you have spent on the card in cashback.

Travel cards

Travel credit cards are designed with features that make using your card abroad easier. These include no fees for foreign transactions and often no fees for cash withdrawals made while overseas.

Credit cards for bad credit

Not everybody has a squeaky clean credit score, and for such people, there are cards that are more likely to accept applicants with a poor credit history. Credit cards for those with bad credit often include features to help manage credit accounts better, such as a lower credit limit and a credit rebuilder feature. However, they typically have higher interest rates.

What is a credit score?

If you are thinking of applying for a credit card, it is likely that you will need to know what your credit score is. Your credit score is a number assigned to you by a credit reference agency in order to let the lender know what type of borrower you are. There are three main credit reference agencies in the UK and each will hold a credit report for you. You can access your credit report for free in order to find out what your score is.

Your credit score matters because it may determine what type of credit card you can apply for. Providers will typically specify what type of credit score they are likely to accept, and if you have a good or excellent score, you stand more of a chance of getting the card you want.

Your credit report is made up of things such as how many credit accounts you have open, your current level of debt, whether you have ever missed any repayments and whether or not you are on the electoral roll.

Luckily, there are ways to improve your credit score. Alternatively, there are credit cards available for those with bad credit, but, as we have already mentioned, they tend to have higher interest rates and don’t include a lot of the introductory offers.

How to apply for a credit card

You can typically apply for a credit card online, either through the provider’s own site or through a comparison site. Alternatively, some providers will allow you to apply in branch or over the phone. You usually need to provide your personal details, information regarding your income and outgoings and sometimes details about your UK bank or building society account.

If the option is available, it could be a good idea to use an eligibility checker before applying. This is a ‘soft search’ to see how likely you are to be accepted for the card that doesn’t leave a trace on your credit report.

Even if you don’t do use an eligibility checker, you should always try to check the eligibility criteria before submitting an application for a credit card. Some cards have a minimum income requirement or prefer applicants to have a certain level of credit score. If your application is rejected, this can negatively impact your credit score, so it is worth checking you are eligible before applying for a card.

Finally, not all applicants are guaranteed the promotional offer. Lenders are required to give the headline rate to 51% of applicants, but the remaining 49% may be offered a different rate or interest-free period. This will depend on factors such as your credit history and personal financial circumstances.

Which credit card is a good choice for me?

This is a personal question, as the credit card that is right for you may not be right for someone else. If you are looking for a new credit card, maybe think about what you need it for. Are you looking to make a large purchase and pay it off over a period of time? Or do you have existing credit card debt that is incurring high interest charges? Questions like these can help to guide you towards a type of credit card that could be a good fit for your needs.

Once you have an idea of what type of card you want, start comparing. Here at The Motley Fool, we have compared credit cards across many different areas and focused on the key features and benefits that are likely to matter the most when you’re choosing a new card. Explore our top picks in each category, taking into account the length of any interest free periods, the regular APR, cashback offers, loyalty points and much more! 

To see our top picks for credit cards, check out our top-rated credit cards page

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Frequently Asked Questions

What is the best credit card available?

The ‘best’ credit card available will differ from person to person. You can start by looking at our best credit cards page to see which card might be a good fit for your situation.

What is a credit card?

A credit card is a payment card that includes a credit agreement with the card issuer. Unlike a debit card, which directly debits the bank account it is linked to, a credit card builds a debt balance as you spend. This balance can (and, ideally, should) be paid off in full at the end of each month to avoid incurring any interest charges. However, you can pay less than the full balance. If you do, you'll be charged interest on the balance.

What is a credit score?

A credit score is a number assigned to you by a credit reference agency that lets lenders know what type of borrower you are. There are three main credit reference agencies in the UK: Equifax, Experian, and Transunion. Your credit score is calculated from the following information:

  • Name and date of birth
  • Electoral roll information to confirm your current address and previous addresses
  • All loans, credit cards and mortgage accounts
  • Current account overdraft
  • Previous application searches and footprints
  • Joint accounts
  • Any missed repayments and how frequent they are
  • History of debt
  • Information about whether your identity has been used for fraud.

How do credit cards work?

The bank that issues the card makes the payment to the merchant on your behalf, and tallies a debt balance for you. You have the option at the end of each month to pay off your entire balance or pay less than that and incur interest on the remaining balance. In order to attract customers, many credit card issuers attach offers to their credit cards, such as long interest-free periods or rewards for everyday spending.

What types of credit card are there?

There are several types of credit card, including purchase cards, balance transfer cards, money transfer cards, reward cards, cashback cards, travel cards and cards for those with bad credit.

How can I apply for a credit card?

You can typically apply for credit cards online, either through the provider’s site or through the links you see on The Motley Fool. Alternatively, for some cards you can apply in the local branch of your bank or over the phone.

To see some of the top rated cards in every category, check out our top rated credit cards page

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