When used responsibly, credit cards can provide a safe, flexible way to pay for things, offering protection on purchases, rewards on spending and allowing you to spread out larger costs.

However, if you’re not able to clear your balance quickly, credit cards can rapidly lead to increasing debt, high interest charges and damage your financial credibility along with your ability to apply for credit in the future.

Here, we explain how different types of credit cards work, the pros and cons, and how to use them effectively, so you can decide whether a credit card is the right option for you.

How do credit cards work?

A credit card is a payment method where you’re essentially loaned the amount you want to spend on goods and services. Instead of using money from your bank account, credit card providers lend you the money, which you’ll be billed for monthly. The bill will include a statement outlining all your purchases, a total balance – which is the amount needed to pay the bill off in full – a minimum repayment, and a deadline for the payment.

If you pay the balance you owe back in full, then you won’t usually have to pay any interest. However, if you fail to pay the full amount, any outstanding payments will be carried over to the next month, and you’ll be charged interest until you repay the total balance. This is usually backdated as well, meaning if you made a purchase at the beginning of the month, you’ll be charged a whole month’s interest on this amount.

If you can, avoid using your credit card to withdraw cash. You’ll be charged fees, up to 4% with some providers and unlike with purchases made on a credit card, with cash withdrawals you’ll typically be charged interest from the day you make the cash withdrawal, even if you clear the balance in full at the end of the month.

If your credit card application is successful, your provider will set you a credit limit and interest rate. Interest is what credit card providers charge you for the opportunity to borrow money, and a credit limit is the maximum amount that you can spend on your card (this can be anything from a few hundred pounds, to several thousand). This will vary with different providers and will reflect your personal circumstances; including your income and credit history. For example, loans to those with the best credit scores will typically have lower interest rates and higher credit limits than loans to those with a less than perfect credit rating. You can get tips on how to improve your credit score here.

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What are the advantages of using a credit card?

When used correctly, they can improve your credit score

If used responsibly – by not fully using your credit limits and successfully paying off your monthly bills in full each month – a credit card can actually improve your credit score. This is because it shows that you’re able to adhere to a contract, manage your money responsibly, and successfully make repayments. Having a higher credit score can improve your ability to borrow in the future, and could also lead to you being offered more competitive interest rates

They offer flexible payment options

Credit cards offer flexible payment options, such as the ability to spread purchases out, or ‘buy now, pay later’, which can be very convenient. For example, if you don’t have the necessary money available until your next payday, or if you want to make a significant purchase, it means you can temporarily borrow from your credit card or spread the cost over monthly payments. Just be sure that you are not tempted to spend more than you otherwise would, purely because you have the extra payment flexibility.

Credit cards are safer than cash

If you lose your credit card or it’s stolen, you can call your bank immediately and they’ll be able to cancel it for you. This means that if your card’s stolen or used fraudulently, you’re much more likely to get your money back than if the same happened with cash.

Credit cards offer purchase protection

If you buy something using your credit card and something goes wrong, your provider has to offer you a level of protection and help to get your money back. This can cover situations such as if a product that you brought never arrived, or if a company that you booked a holiday through went out of business. 

Under section 75 of the Consumer Credit Act, you’re protected if you make a purchase using your credit card for anything over £100 and up to £30,000. The law means that your credit card provider has equal responsibility with the company you purchased from if there’s an issue with anything you’ve brought, or if the company goes bankrupt.

You can read more about credit card payment protection here, including what section 75 of the Consumer Credit Act covers, when you’re covered, and how to claim money back.

They may come with freebies, rewards or promotional offers

Credit cards can sometimes bring added bonuses such as airmiles, reward points, and cashback. Some cards also offer lengthy 0% introductory periods on balance transfers or purchases, giving you the opportunity to pay back what you owe over time without being hit by steep interest charges.

What are the disadvantages of using a credit card?

High-interest payments can lead to debt

When using a credit card, if you don’t pay back what you borrow each month, your provider will usually start charging you interest on the outstanding amount. Unless you are on a promotional interest rate, the interest rates on most credit cards can be very expensive and rack up quickly – making it harder to pay down your balance.

If used incorrectly, they can negatively impact your credit score

Parts of your credit card activity will be documented in your credit report, including how many cards you have, your credit limit, and how many cash withdrawals you’ve made. Crucially, credit reports also record your repayment history for up to six years, which will cover any missed or late payments. Typical behaviour that can negatively affect your credit score includes withdrawing cash, missing or being late with your repayments, fully utilising your credit limits and only ever making minimum repayments. These are some of the behaviours that can negatively impact your credit score and make it harder to apply for credit in the future.

They can incur extra fees and charges

Charges will vary from card to card, however most credit cards will charge additional fees for certain things. These could include penalties for exceeding your credit limit or missing a payment. You’ll also be charged interest and an additional fee for withdrawing cash, usually around £3 for each transaction. Similarly, credit card cheques can be expensive because they’re treated like cash withdrawals with higher interest rates and often some added fees on top.

They can be expensive to use abroad (and online in shops based abroad)

Most cards are expensive to use abroad and will charge you steep fees to withdraw cash or purchase something, though charges will vary depending on which card you have. This is true whether you are physically travelling in a country, or simply shopping online from the comfort of your own home if the website is based abroad and charges in a foreign currency such as dollars. However, there are some credit cards that are specifically designed to be very cost effective when used abroad. You can read more about cheap credit cards to use abroad here.

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How can I use my credit card effectively?

To make sure you get the most out of your credit card without affecting your credit score or running into unwanted debt, here are some helpful points to consider.

Stay on top of your bills and consider setting up a direct debit

When your bill comes through each month, it might seem tempting to just push back a little amount until next month, and then a little more the next. But it’s important to stay on top of your payments and be wary of continually paying only the minimum repayment because interest will add up quickly. To avoid getting into debt, aim to pay off your credit card bill in full each month in order to avoid paying interest. However, if you’re unable to do this every month, try and pay off as much as you can to reduce the amount of interest you will be charged.

The minimum repayment amount will depend on a few things including how big your bill is, and who your credit card provider is. However, a typical minimum repayment will usually be around 1% to 2.5% of the total amount each month, or between £5 and £25, whichever is higher. Usually, this will include any interest or charges you’ve incurred.

If you’re worried about staying on top of your payments, consider setting up a monthly direct debit. This will automatically transfer money from your bank account to pay your credit card bill each month, so you won’t have to worry about manually doing it yourself. Setting up a direct debit is quick and easy, and can usually be done online via banking apps. Information on how to do this will differ depending on your bank, so it’s best to contact them directly.

Don’t spend anything you don’t think you’ll be able to repay

Credit card payment methods such as ‘buy now, pay later’, or spreading purchases over several monthly repayments can offer greater freedom and financial flexibility. While this may initially seem great, before opting for these, take time to consider whether you’ll be able to repay the amount, taking into consideration any interest you might have to pay on top.

Avoid using your credit card to withdraw cash

As mentioned earlier, credit cards charge you to make cash withdrawals and interest will be added to your account immediately, even if you pay off the balance before the due date. Not only is it an extremely expensive way to borrow money, but cash withdrawals might show up on your credit record and could impact any future credit applications you make. So avoid doing this at all costs.

Avoid exceeding your credit limit

If you exceed your credit limit, you’ll face additional charges, so make sure you stay within the limit sets. It’s also helpful to make sure you don’t fully utilise any credit limit you have, as consistently borrowing the full amount each month can make your credit history look like you’re not fully in control of your borrowing.

If however, you’ve accidentally exceeded your credit limit by a few pounds, then it might be worth contacting your credit card provider immediately and request it be cleared free of charge.

It’s also important to be aware that some places like hotels, car rental agencies, and tour operators may use your credit card for a pre-authorisation. This is so that if you use services such as the mini bar or the spa and don’t pay for it, they can charge you. If this happens, it will involve them putting a hold on your credit card, for example £500. When in place, you won’t be able to spend that money, meaning your credit limit can be affected. Even after they remove the hold, it’s common for there to be a few days in between your credit limit returning to normal. Therefore, it’s important to be mindful of any purchases you make where this might happen to help you ensure you remain within your credit limit in these situations.

Choose a credit card that meets your needs

There are many different types of credit cards available and if you have a good credit history, it can be helpful to have different cards for different uses. Before applying for a credit card, it’s best to consider what you’ll be using it for so you can choose one that’s most appropriate to your needs. Below are some of the options available:

  • Balance transfer cards: If you’ve got existing debt or a balance that you’d like to pay off quicker and with less interest, you may be able to do so with a balance transfer credit card which offers a lengthy 0% introductory rate. Whilst many 0% balance transfer cards will have an initial, one-off balance transfer fee to pay, the aim is that you will be able to pay back what you owe without being charged interest, potentially saving you significant sums of money. You can read about the best balance transfer cards currently available in our article Balance transfer credit cards and personal loans compared.
  • Purchase cards: These cards can help spread the cost of a large purchase. They usually offer an interest-free period, which can make them a cheaper way to borrow.
  • Dual credit cards: These cards combine the benefits of balance transfer cards and purchase cards. It can help you spread out the cost of large purchases, while also reducing the amount of interest you pay, usually in exchange for a fee.
  • Reward cards: With this type of card, you get rewards for using it. For example, you might get air miles, cashback, or shop discounts based on a percentage of how much you spend. These cards often come with high interest rates so are usually most suited to those who will be paying their bills off in full each month. Otherwise you are in danger of the interest charges outweighing the benefit of any rewards. You can read about the best reward cards currently available in our article What are the best reward credit cards?
  • Money transfer credit cards: These cards essentially let you borrow cash. You can transfer money from the card into your bank account, usually in exchange for a small fee. They’re often used to help clear bank overdrafts.
  • Credit builder cards: If you’ve got a low credit rating, these cards can help you build your credit history. Because they’re designed for people seen as high risk applicants, these will typically have high interest rates and low credit limits. However, if you successfully pay your monthly bills on time and in full, these cards can help improve your credit score over time, and therefore increase your chances of being able to borrow again in the future. You can read about the best cards for building your credit score in our article What are the best credit building credit cards?
  • Travel credit cards: If you’re going abroad, specialist travel credit cards can help reduce the cost of using a credit card in another country. You can read about the best travel credit cards right now in our article What are the best cards to use abroad?

To be eligible for most credit cards, you’ll need a good credit score. There are three main credit reference agencies which offer you access to your credit report: Experian, Equifax and TransUnion (formerly Callcredit). It’s worth checking your report for any errors before submitting a credit card application, as you can add a note to your credit file or have an incorrect record removed if necessary.

ClearScore offers a free credit checking service that accesses Equifax data. They also offer free identity protection that scans for stolen passwords, security problems and fraud defence tips. Other options include MoneySuperMarket’s  Credit Monitor tool which enables you to check your credit score free of charge using data from credit reference agency TransUnion and offers free personalised tips to help it grow. Experian also has a free service that enables you to sign up and check your credit score with them.

Is a credit card the right option for me?

Before applying for a credit card, it’s important to consider whether it’s the right option for you.

  • If you don’t feel confident that you won’t spend more than you can afford to repay, then a credit card might not be right for you. If you’re already struggling with debt, then it’s much better to address any existing bills and debts before taking on any more.

If you’re struggling with debt and would like help, you might find our article Serious debt: your options explained useful.

  • If you already have a poor credit history, it’s worth considering whether your credit card application is likely to be successful. Remember, any credit applications will show up on your credit history, regardless of whether they were successful or not. Too many credit applications can put lenders off because they’ll deem you to be desperate to borrow and therefore a higher risk applicant.

Equally, if your application is successful but you’ve got a poor or limited credit history, credit card providers may charge you higher interest rates because you’ll be deemed a higher risk of not being able to make your repayments. Interest rates can be sky high and debt can easily pile up very quickly if you don’t pay your bills off in full each month, so it’s important to carefully consider if you think you’ll be able to repay what you borrow before committing.

Final thoughts...

There are various things to think about when applying for a credit card. The possibility of getting into debt and seeing the fees and charges rack up might, quite rightly, seem daunting or put you off altogether. If however, you are confident that you can stay on top of your payments and pay back what you spend each month, credit cards can be an extremely helpful payment tool with some added benefits such as rewards and purchase protection.