How do credit cards work, and which one should I get?
Credit cards can be a convenient way to spread your costs, but you need to know how they work and your best options before applying for one. If you don’t use them correctly, interest payments can be costly and affect your credit score.
How do credit cards work?
There are various credit cards on the market that are ideal for different purposes and have a pre-agreed credit limit.
You’ll be charged for any spending at a specific interest rate, but you may not incur interest if you pay off your account balance each month or are offered a 0% rate for a set period.
Provided you always pay your debts on time and keep within your limit, a credit card can be useful and help you build up your credit score, helping you access the best loans and mortgages.
So, which one is right for you?
What are the different types of credit cards?
Finding the right credit card is important; you should choose one that meets your needs.
Here are some of the different types of credit cards and what they are used for:
0% APR credit cards
With a 0% APR credit card, you’ll get charged no interest for a set period of time, which in some cases, can exceed two years.
You can typically use these credit cards for large purchases or balance transfers, but it’s best to check the interest-free periods beforehand as these can vary.
It’s worth looking into cards with the longest interest-free periods, but you’ll need a good credit score to qualify for the best cards.
Balance transfer cards
Balance transfer cards can reduce the cost of existing debt. You can transfer a balance from an existing credit card to a balance transfer one, which offers a long interest-free period to help you pay off your debt.
These cards may have a ‘balance transfer fee,’ usually a percentage of the amount you plan to transfer. Some credit cards don’t have this fee but may offer shorter 0% periods.
Credit builder credit cards
These credit cards can boost your credit rating, helping you access better deals if you need to borrow in the future. So, it can be useful if you have a low credit score or limited credit history.
Credit builder cards often have higher interest rates and lower credit limits.
Reward and cashback credit cards
Reward credit cards offer benefits when you spend, so you may be able to accumulate points that you can use for money off flights and hotel stays, for example.
One downside is that you may be limited to getting rewards from a certain retailer.
Cashback credit cards offer you money back when you spend with the card, and you can get extra cash when you spend over a certain amount, but these tend to have high annual fees and interest rates.
Both credit cards usually do not offer 0% interest-free periods, so paying back in full every month is vital.
Who is eligible for a credit card?
Credit card providers will examine your financial status and credit report before deciding whether you’re eligible.
If you’ve always kept up with payments on existing loans, mortgage, or other credit cards, you’ll have a better chance of qualifying.
How do I apply for a credit card?
Firstly, deciding which kind of credit card suits your needs is important. You can then use an eligibility checker to see whether you’ll be accepted without impacting your credit score.
Next is ensuring you’ve got all the information a lender will ask for, including personal details such as your address, income, outgoings, bank account and contact details.
Now it’s time to fill out and submit an online application with your chosen lender, and if you’re accepted, you’ll receive your credit card through the post.
The advantages and disadvantages of a credit card
The advantages of having a credit card include:
The ability to spread the cost of purchases
Interest-free borrowing
Potentially boosting your credit score
Some disadvantages include:
High-interest rates (outside of 0% interest periods)
The risk of getting into debt if you don’t keep up with regular payments
The temptation to spend money you don’t have
High charges for exceeding credit limits or missed payments
The right credit card can help you spread your payments on expensive items, but choosing the right one is vital for your circumstances.
If you want to control your finances, a financial advisor can help you start making confident financial decisions today. Unbiased can match you with your perfect financial professional. Get started today.
Senior Content Writer
Lisa-Marie Voneshen is a Senior Content Writer at Unbiased. She is an award-winning journalist with nearly a decade of experience writing and editing content across various areas, including personal finance and investing.