How Do Credit Cards Work?

With the multitude of different types of credit card available, you could be forgiven for wondering which is the right one for you.

What is a credit card?

Firstly, the term 'credit card' is completely misleading as these are 'debt cards' as they allow you to borrow on them - money you need to pay back, ie, debt.

As 'credit card' is such a common term we will continue to use it here for clarity, but be aware that debt is like fire - used right and it's a useful tool but used wrongly and you'll get burnt.



All cards come with a credit limit, which is the maximum amount you can borrow. Lenders decide how much the limit is based on a number of factors including your income, credit score and other debt repayments. These factors also determine if you are even accepted in the first place.

If you borrow money on a credit card, you'll be charged a rate of interest, calculated as an APR (annual percentage rate). However, most cards waive interest on spending (not cash withdrawals) if you pay the money back in full by the due date on your monthly statement.

If you do chose to apply for a card, remember to use our credit card eligibility calculator first so you can check your chances of acceptance without affecting your credit score.

How do balance transfer credit cards work?

A balance transfer is when you get a new card that repays debts on other credit or store cards for you, so you owe it instead - often at 0%. This means you'll be debt free quicker as repayments will go towards clearing the actual debt, not interest.

The longer the 0% period, the longer you have to clear the debt without worrying about paying interest. The longest deals typically have a one-off fee as a percentage of the amount borrowed, yet there are other cards - albeit with shorter 0% periods - where you can shift the debt for free.

To be sure, pick the card with the lowest fee in the time you're sure you can repay. If unsure go longer for safety, even if there's a fee. Importantly, they're NOT for new borrowing as it isn't usually at the cheap rate.

This helpful little video gives you the balance transfer lowdown...

How do 0% spending credit cards work?