Understanding credit cards

Credit cards allow you to borrow up to a pre-approved credit limit, these are forms of revolving credit, meaning you can borrow and repay repeatedly. Credit cards can be used for a number of purposes and the type of credit card you get, influences how you’ll use your credit card. Now well look at the 4 main types of credit cards – 0% spending, rewards (airline points/cashback), balance transfer, money transfer.

0% Spending

Usually used for a large planned purchase, 0% credit cards can be used to spread the cost of a purchase by the length of the offer. You can buy with credit and not pay any interest for an agreed term (usually 18-24 months).

Rewards

Rewards cards are used to give you something back when you spend with your credit card. This can be cashback on your purchases, points at an airline or other discounts and vouchers.

Balance transfer

A balance transfer card is useful when you have an outstanding credit balance (or many). Usually, for a one off fee of around 3% these cards will give you a new 0% interest offer for your credit balance so you can pay it off without paying more interest.

Money transfer

These cards also charge a small fee but will transfer cash into your bank account. You can use this to pay off an overdraft quickly or if you need a cash loan without the interest (so long as it is repaid within the period).

You can spend up to a pre-set credit limit, and each month you’ll receive a statement showing your credit usage. If you repay within the specified period (typically 28 to 55 days, or longer with zero percent offers), you avoid interest charges. Failing to repay on time may result in interest rates of up to 30% or more.

Using a credit card also provides protection under section 75 of the Consumer Credit Act for purchases over £100 (up to a certain limit). Section 75 makes the credit provider liable if goods don’t arrive or are faulty and the retailer won’t resolve the issue. However, this protection isn’t an insurance or warranty. For more on section 75, visit MoneyHelper.

• How it works: Credit cards allow you to spend up to a pre-agreed credit limit. You will normally get a statement each month showing how much credit you’ve used and if you repay it within a certain timescale you won’t need to pay interest. Some credit cards only require you to make at minimum payments to avoid paying interest (0% offer) but for some cards you need to completely pay off your credit bill each month to avoid paying interest.
• Positives: Credit cards provide flexible borrowing, are can be used directly for purchases rather than having to involve an extra step, often can offer rewards or cashback and include protection through section 75.

Learn more about Section 75

Using a credit card for purchases over £100 gives you extra protection under Section 75 of the Consumer Credit Act. Section 75 of the Consumer Credit Act protects credit card purchases between £100 and £30,000. This means that your credit card provider is responsible for making sure the goods you buy arrive and are in good working condition. If the goods don't arrive or are faulty, and the retailer won't help, you can contact your credit card provider for assistance. Remember, Section 75 isn't insurance or a warranty. For more information about Section 75, visit MoneyHelper.

• Please note: If repayments are not paid on time, you could be subject to high interest rates, particularly if only minimum payments are made. This can lead to long-term debt if balances are not cleared.