Credit Cards

How a credit card works

A credit card gives you a revolving credit limit you can spend up to. Each month you receive a statement showing what you owe and a payment due date. If you clear the full statement balance by the due date, you usually pay no interest on purchases. If you pay less, interest is charged on the remaining balance.

You must pay at least a minimum amount each month. Paying only the minimum keeps the account in order but means the debt reduces slowly and costs far more in interest over time.

Common types of credit card

Cards are marketed for different purposes, and the right one depends on how you intend to use it:

• Everyday or rewards cards — for general spending, sometimes with cashback or points
• 0% purchase cards — an interest-free period on new spending, after which the standard rate applies
• 0% balance transfer cards — move existing card debt to pay it down interest-free, usually for a transfer fee
• Credit-builder cards — lower limits and higher rates, aimed at building or rebuilding a credit record

The cost of borrowing

Cards advertise a representative APR, but the rate and limit you are actually offered depend on your circumstances. Introductory 0% deals end on a set date, after which interest applies, so note when a promotion finishes. Cash withdrawals on a credit card often carry a fee and start charging interest immediately, even if you pay the statement in full.

Minimum payments and persistent debt

Paying only the minimum each month is allowed, but it is the most expensive way to use a card: much of your payment can go on interest, so the balance falls very slowly — you can see how long minimum payments take to clear a balance. Under the FCA’s rules on “persistent debt”, if over an 18-month period you have paid more in interest, fees and charges than you have repaid of what you borrowed, your provider must step in.

Your provider must contact you at around 18 months, again at about 27 months, and at 36 months. If you are still in persistent debt after 36 months it must propose ways to help you clear the balance faster — normally over a reasonable period of three to four years — and, where you genuinely cannot afford the higher payments, consider reducing, waiving or cancelling interest and charges. If you are struggling to clear what you owe, there is more help for credit card debt.

Section 75 purchase protection

One of the biggest advantages of a credit card is protection under Section 75 of the Consumer Credit Act 1974. For a single item or service costing more than £100 and up to £30,000, your card provider is jointly liable with the retailer if something goes wrong — and this can apply even if you paid only a deposit on the card.

Debit cards are not covered by Section 75, but you may be able to use the separate “chargeback” process instead. Our guide to Section 75 and chargeback explains how both work, the time limits and how to make a claim.