There are two main types of card:
- Cards that let you borrow money and pay it back later (credit cards, store cards and charge cards)
- Cards that only let you spend money you already have or within an agreed overdraft facility (debit and prepaid cards)
Which one suits you best will depend on your finances, and your personality too.
This could depend on whether you’re confident about paying off your card bills and disciplined enough to do so, or whether you feel more comfortable not getting into debt.
A credit card is a way to buy things now and pay later. You can run up a bill to an agreed limit and either pay it off in full at the next monthly statement, or repay over time as long as you make at least the minimum payment each month.
Who are they for? Usually only for people with very organised finances – otherwise there is a real risk of spiralling into debt. Even if you set up a Direct Debit to pay the full amount monthly, if you are not on top of your bank balance you could go overdrawn when the payment comes out. They’re available to over-18s only.
√ Credit cards give good protection against fraud.
√ Credit cards provide extra protection if you have problems with the goods or services you have bought that cost between £100 and £30,000.
√ Credit cards provide an easy way to pay for the unexpected.
X If you don’t pay back the full amount there’s usually hefty interest on the money you’ve borrowed - unless you can get a card with a 0% introductory offer and make sure you repay in full before the introductory period ends.
Case Study - "I don’t like borrowing money, but I still pay with my credit card because of the fraud protection.” Alison
For more information see Credit cards.
Money fitness tip
Plastic cards can make your life easy, but make sure you can pay off the bill every month or you have enough money in your account.
A debit card is like a direct link to your bank account – when you shop or buy services the money is taken out of your account right away.
Who are they for? Almost anyone with a standard UK current account, though if you plan to use it overseas you should check the charges first.
√ There’s no borrowing involved, except if you go into (or over) your overdraft.
X Debit cards have some fraud protection against unauthorised transactions, but not as much as credit cards.
They don’t have the same legal protection, but you might be able to claim under ‘chargeback’ (part of the card scheme rules) if you have problems with purchases.
Debit cards might be worth using if you are buying something that costs less than £100, as credit cards don’t protect you for purchases you make under this amount.
For more information see Debit cards.
Store cards are a type of credit card you can only use in one chain of shops.
Who are they for? Only a good idea for people who often spend a lot in a particular store, and are absolutely sure they’ll pay off the bill every month.
√ They come with deals and discounts in-store.
X The very high interest rate is usually much higher than an credit card, so it will cost you more if you don't repay in full each month.
Unlike store-branded credit cards however, you can only use them in that store.
For more information see Store cards.
A prepaid card works a bit like a gift card – you top it up with money, and you can only spend up to that amount.
Who are they for? Often used by travellers to carry holiday money, and by anyone without a normal bank account – generally teens and people with poor credit ratings.
√ Safer than cash, since you can cancel the card if it gets lost or stolen.
X They’re not accepted everywhere, and you may pay fees for using them or for topping them up.
For more information see Prepaid cards.
Charge cards work a lot like credit cards – you buy now and pay the money back on your monthly repayment date. However, with a charge card you must pay off the balance every month. You can’t run up a bill and pay it back later.
Who are they for? Generally only for people on high incomes who can afford to repay in full each month, or for business use.
There are also a few basic charge cards, but they don’t have much advantage over credit cards.
√ They often come with extra perks such as travel insurance or rewards, but usually at the price of a high annual or monthly fee.
X If you don’t pay your bill the charges can be much higher than credit card interest – and your card may be cancelled.
Credit builder cards
If you’ve been turned down for a card because you’ve got a poor credit rating, one way of rebuilding your credit history is to use a credit builder card. But the interest rates are usually much higher, and if you miss payments or only pay the minimum each month, it could end up making your credit rating worse.
See recommendations for the best cards to rebuild your credit score on the Money Saving Expert website
There are other things you can do as well to improve your credit rating - see How to improve your credit rating.