How Credit Cards Work in the UK

The basics

When you use a credit card, the card company pays the shop and you owe the card company. Every month you receive a statement showing what you have spent, the minimum payment required and the date by which you must pay. Your credit limitCredit limitA credit limit is the maximum amount a lender allows you to borrow on a credit card or similar account.Read more → is the maximum you can owe at any time.

You choose how much to repay each month, subject to the minimum payment:

• Pay in full: you normally pay no interest on purchases, as long as you pay by the due date
• Pay part: you pay interest on the remaining balance
• Pay the minimum only: the debt takes a very long time to clear and the interest cost is high

Interest and APR

The APR (annual percentage rateAPRAPR, or annual percentage rate, is the yearly cost of borrowing, including interest and mandatory fees, shown as a percentage.Read more →) shows the yearly cost of borrowing, including interest and mandatory fees. Credit card APRs are typically much higher than those for personal loansPersonal Loans Explained: What to Know Before BorrowingHow UK personal loans work: APR, fixed repayments, secured versus unsecured, early repayment charges, eligibility checks and how to borrow safely.Read more →. The representative APR is the rate that must be offered to at least 51% of people who are accepted, so you may be offered a different rate.

Interest is usually charged on a daily basis on the balance you carry. If you do not pay the full statement balance, many cards charge interest on your purchases from the date they were made, not from the statement date. Check the terms of your card.

Interest-free period

Many cards offer up to around 56 days of interest-free credit on purchases, if you clear the full balance each month. If you carry a balance from one month to the next, you usually lose the interest-free period on new purchases until you clear the balance in full.

Minimum payments

The minimum payment is usually the larger of a small fixed amount or a percentage of the balance plus interest and charges. Paying only the minimum keeps the debt running for years. Card companies must show you how long it would take to repay if you only make minimum payments, and how much you would pay in total. Setting up a direct debitDirect debitA Direct Debit is an instruction to your bank to let a company collect varying amounts from your account on agreed dates.Read more → for the full balance, or at least a fixed amount above the minimum, makes the debt shrink faster. Our debt repayment calculator shows the difference.

Fees to watch

• Annual fee: charged by some cards, especially those with rewards or premium benefits
• Late payment fee: if you miss the due date
• Over-limit fee: if you go beyond your limit
• Cash advance fee: for withdrawing cash
• Foreign transaction fee: for spending abroad

Consumer protection

Credit cards offer some extra legal protection that debit cards generally do not.

Types of credit card

• Standard purchase cards: for everyday use, some with 0% on purchases for an introductory period
• Balance transfer cards: designed for moving existing balances at low or 0% interest for a time. See our guide to balance transfers.
• Rewards cards: offer cashback or points, but often have higher APRs or fees. They only make sense if you always pay in full.
• Credit builder cards: for those with little or poor credit history. They usually have low limits and high APRs.
• Store cards: run by retailers, typically with high rates.

How a credit card affects your credit score

Using a card responsibly can help your credit scoreHow Credit Scores Work in the UKHow UK credit scores work: what the credit reference agencies record, what affects your score, why scores differ between agencies and what lenders actually see.Read more →: paying on time shows reliability and a low balance relative to limit shows you are not overstretched. Missing payments, maxing out cards or applying for several cards at once can harm your score. See our guide to how credit scores work.

Using a credit card safely

1. Set up a direct debit for the full balance, or at least the minimum, so you are never late.
2. Only spend what you can pay off at the end of the month.
3. Avoid cash withdrawals on a credit card.
4. Keep an eye on your statements for unauthorised transactions and report them straight away.
5. Do not use one credit card to pay off another without a plan. If you want to move debt, see our guide on balance transfers.
6. Store the card securely and never share your PIN or full details with anyone who contacts you unexpectedly.

If you cannot keep up with payments

Contact the card company as soon as possible. Under the rules set by the Financial Conduct Authority, firms must treat customers in financial difficulty with forbearance and due consideration, which can include freezing interest or setting up a reduced payment plan. Get free advice from StepChangeStepChange Explained: What It Does and How It WorksWhat the debt charity StepChange offers, how its free debt advice and debt management plans work, who it suits and what to expect when you contact them.Read more →, National DebtlineNational Debtline: How It Works, When to CallWhat National Debtline is, who runs it, what it can help with, how to get free advice by phone, webchat or online tools, and what to expect.Read more → or Citizens Advice. Our guide to dealing with creditors explains what to say.