Credit cards

If you’re disciplined enough to always pay back what you borrow each month, a credit card is a safe, secure way to spend – but if you run up a bill and can’t pay it back, the high interest rates can get you into problem debt.

Find out the pros and cons of credit cards and stay MoneyFit when using them.

How does a credit card work?

A credit card lets you spend money on credit. You can spend up to a pre-set credit limit, which might be a few hundred or several thousands of pounds. It depends on how confident your card provider is that you will pay it back.


If you have a balance of £1000 on a credit card at 22% APR and pay off the minimum 3% each month you will end up repaying  about £2300, and it will take over 15 years...

It is usually advisable to pay off the bill every month.  If you do you won’t pay interest on what you have borrowed (except for cash withdrawals, where interest is usually charged on a daily basis from the day you take your cash). 

If you don’t pay off any outstanding balance in full then interest will be charged. It’s usually backdated too, so if you bought something at the start of the month you’ll be charged a whole month’s interest.

Don't be tempted to use credit cards at cash machines to withdraw money. You’ll be hit with charges – up to 4% or more with some companies.


  • Unless you are in a 0% or other introductory period, a credit card is usually only right for you if you’re sure you’ll pay off the amount you borrow each month. 
  • You will still need to make the minimum payment each month. Set up a Direct Debit for the full monthly outstanding balance, or at least the minimum amount to be paid from your bank account. This will help avoid unwanted charges and the loss of any introductory incentives.
  • You will undergo a credit assessment by any potential card providers when you apply. A good credit rating will improve your chances of a successful credit application. It could also give you access to cards offering the lowest interest rates and/or promotional offers.
  • You must be at least 18 to apply for a credit card. With some cards the minimum age is 21.


...but pay off £100 a month, and the balance will be completely paid off within a year!


  • Easy to carry, easy to use. Credit cards are accepted at more places than charge cards and prepaid cards.
  • Safer than cash. If your card is lost or stolen, just call your bank and cancel it. If it is stolen and used fraudulently, you’re much more likely to get the money back.
  • Buy now, pay later. If you don’t have the cash you need till next payday, a credit card gives you some extra financial wriggle room – though you should only use it if you’re confident you can pay it off.
  • You’re protected. With most credit cards you’re protected for any purchase over £100 and below £30,000 – so if you book a holiday and the provider goes out of business, the card company should cover the cost. Or if you buy a faulty TV and the seller won’t refund your money, the credit card company will reimburse you.
  • Freebies often come with credit cards – things like air miles, reward points and cashback. Find out more about Cashback credit cards.  

Money fitness tip

Go to our Credit card calculator and work out how quickly you can pay off your credit card with fixed monthly payments


  • High interest payments. If you don’t clear your balance at the end of each month you’ll have to pay interest on your outstanding balance.
  • Beware the debt spiral. Miss just one payment and the interest will start to add up. Unless you pay off what’s owed each month, you can quickly spiral into debt if you continue spending on your card.
  • Additional fees. as well as the interest, you could find yourself paying additional fees or penalties for exceeding your credit limit or missing a credit card payment. There are usually additional fees, for excample using a cash machine.
  • Deposits and pre-authorisations can cut into your credit limit. Some places, like hotels, petrol stations or car rental firms, might use your credit card to take a pre-authorisation. This is so they can charge you if you use things such as the mini-bar and don’t pay for it. They’ll put a hold on part of your credit limit - usually only a nominal amount - and while it’s in place you won’t be able to spend the money. Even after they remove the hold there may be a few days’ wait until your credit limit is back to normal.
  • Expensive to use abroad. This very much depends on the card. Some are designed for travellers, others are very expensive when it comes to fees. See Using cards cheaply abroad for more information.

Money fitness tip

If you have more than one credit card, find out which card has the highest APR and focus on paying that card off first.

Charges and fees

Be careful how you use your credit card. There are all kinds of ways you can incur charges.

Watch out for interest rates

If you don’t pay off your credit card balance at the end of the month it's likely you’ll pay interest on what you owe on the whole of the statement balance.

New customers beware! You may get an especially low introductory interest rate when you first get the card. But these usually increase considerably once the introductory period is over.

If you’re transferring your balance from another card, check if you will be charged a fee, as is usually the case. The fee is often around 3%. You need to calculate whether it is worth paying a charge of 3% of the amount you are transferring to benefit from paying no interest for a limited period on the debt.

Late payments charges damage your credit rating

If you make your payment after the monthly deadline on your statement, you may have to pay a late payment charge. Any 0% or other introductory rate could also be withdrawn. On top of this, other companies  may see that you were late, as part of your credit record. This could have a negative impact on future credit applications including applying for a mortgage.

Minimum payments can get out of control

When you get your credit card statement you can choose to pay off a minimum amount, the whole thing or any amount in between. If you only pay the minimum amount, you’ll start paying interest on everything left over. It’ll take longer to pay off your debt, and you’ll end up paying a lot more than you borrowed.


How the total cost to pay back your borrowing goes down if you choose a higher monthly repayment. It assumes you have £1,000 balance, are charged 18% interest and no longer use the card.

 Monthly repayment  £100  £30
 Total interest  £85  £353
 Total cost  £1,085  £1,353
 Time taken to clear balance  11 months  3 years and 10 months

By paying £70 more each month you’d pay £268 less in total and pay off your debt 2 years and 11 months earlier. Now use our Credit card calculator to see how much your outstanding balance will cost you to pay it off.

Cash withdrawals cost money

Credit and debit cards work very differently at cash machines. Debit cards are mostly free or tell you if there is a charge. If you use your credit card you may pay a fee every time you take out cash and you may not be warned of the extra cost when you use the machine. Fees can be as much as £5 per withdrawal. You’ll also be charged interest on the money, even if you pay it off by your card repayment date. This includes taking foreign currency cash overseas.

Credit card cheques come with fees

A credit card cheque is like a normal cheque, but the money goes on your credit card bill instead of coming out of your bank account.

  • There are fees. They’re often quite high, perhaps as much as for a cash withdrawal.
  • Credit card cheques do not have the same protection for your purchases as card transactions.

They’re much less popular now and you have to ask for them from your card provider. However, they’re best avoided.

Shopping around for a credit card

If you’re sure a credit card is right for you, follow the links below to help you shop around.

How to use credit card comparison tables on the Money Advice Service's website.

Go to the Which? website for credit card reviews.

Last reviewed: 30/11/2016

This content has been provided by the Money Advice Service