#credit cards explained

#Why use a credit card?

Credit cards can be a quick and easy way to borrow money to pay for things. Let s say you are window shopping and spot a must-have pair of shoes. You have no cash to hand, but it doesn t matter. You can simply pay with a credit card. Or maybe you need a new dishwasher or washing machine, but it s still a long way to pay day. Don t worry! You can put the purchase on a credit card.

There s another advantage to credit cards. If you buy something that costs between 100 and 60,260 with a credit card and it turns out to be faulty or the company goes bust, you can get your money back from the card issuer.

Penalty charges

Of course, there are downsides to credit cards. If you don t pay your monthly bill in full, you could start to rack up hefty interest charges. There are also penalty fees for late or missed payments. But if you play your credit cards right, they can be a great way to manage your money, particularly if you regularly shop online.

Borrow money for free

A credit card is not the same as a debit card. When you pay for something with your credit card, you are essentially borrowing money and credit cards charge interest on the loan. However, most cards come with an interest-free period of up to 59 days, so if you pay off your bill in full each month, you pay no interest. In other words, you can borrow money for free.

Spread monthly payments

If you are unable to clear the debt each month, a credit card can help you to spread the monthly payments. But you will start to pay interest. The typical rate on a card is about 18%, so it s not cheap. You should therefore think of a credit card as a short-term stop gap. Credit cards are not suitable for long-term loans. And always try to pay more than the minimum monthly payment, otherwise you will spend a fortune in interest and could take years to clear the debt.

Pick a card

There are various different types of credit card and the right card for you depends on your credit history and your spending habits. If you always pay off your balance in full, the interest rate on the card is irrelevant. So look for a card that rewards spending, such as a cashback card .

A card that charges 0% on purchases can be a good deal if you want to spread the cost of a purchase. Maybe you need a new washing machine but can t afford to pay for it all at once.

Or, you can choose a 0% balance transfer card if you have already built up a debt on another card or cards at a high rate of interest. With this type of card you can move a debt over from an existing credit card there will be a fee for doing so but this is usually worth paying as it is still likely to cost you less than if you kept your debt where it was. Also, the fee is paid upfront, it is added to your balance.

Some people can t be bothered to switch cards frequently, so they might prefer a card that offers a low lifetime rate for either purchases or balance transfers. Then there are cards that are more suitable for frequent travellers because they charge no or low fees for use abroad.

Credit history

When you apply for a credit card, the issuer will carry out a credit check. If you have a poor credit history, your application could be turned down. Alternatively, the card company might not offer the advertised rate but will instead charge a higher rate of interest.

A card that charges 0% on purchases can be a good deal if you want to spread the cost of a purchase.

This is called risk based pricing and the rate you see advertised will be the representative annual percentage rate . This must be offered to at least 51% of people whose applications are accepted. However, that means nearly as many 49% - could be accepted for the card but they ll be charged a higher rate of interest.

People with a low credit score often find it difficult to get credit, but they can apply for so-called credit builder cards. They often charge high rates of interest but they can help to improve your credit rating.

Finding the best deal

The choice can be bewildering, but MoneySupermarket s free independent comparison service can help you find the right credit card. We compare hundreds of deals from the country s biggest card issuers. So, whether you want a 0% purchase card. or a cashback deal, we can search for the best offers on the market. To find out which cards you'd be accepted for without affecting your credit score, try our quick and easy card search .

Do you want to find out more? View our 'What is a good credit score' guide.

We're free, independent and compare all UK credit cards as well as offering exclusive deals you can't get anywhere else.