How credit cards work

Before you think about getting a credit card, it’s really important you understand how they work so you know what to expect. Borrowing money, which is essentially what you’re doing when you use a credit card, comes with great responsibility.

So, whilst you’ll naturally want to focus on what deals or perks you can get from the best cards available, you first need to make sure that you will be able to afford to pay back what you spend in accordance with the terms of your credit card agreement. Read on for further information on how credit cards work.

How do credit cards work?

When you pay for something with a credit card, whether it’s goods, bills, or a cash withdrawal – you’re borrowing money from a credit card provider. The funds that you are borrowing come with an interest rate which will be agreed by yourself and the credit card provider before you accept the credit card contract.

Interest rates, (which will vary depending on which card you have chosen, your credit score, and your eligibility, may be fixed or may change after an agreed period of time (depending on the deal you agree with the credit card provider). Some credit cards also have interest free periods, meaning you don’t pay any interest on what you spend during this time.

Paying off your credit card debt in its entirety before interest is applied is the best thing you can do. Not only does this build up your credit score – as it proves you’re financially responsible enough to pay back everything you spend – it also means you pay no interest on the money you’ve borrowed.

However, if you choose to pay back the amount you spend in several instalments, then you also have the option to do this by making a ‘minimum payment’ every month. The minimum payment will depend on how much you have spent and what your current spend limit is.

Visit our credit card repayment section for a full breakdown of how to pay off your credit card, what happens if you miss a payment, and how credit card statements work.

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